First Merchants Corporation Aktie

Thank you for standing by, and welcome to the First Merchants Corporation First Quarter 2026 Earnings Conference Call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the future performance and financial condition of First Merchants Corporation that involves 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 a reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded. I would now like to turn the conference over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

Good morning, and welcome to First Merchants' First Quarter 2026 Conference Call. Thanks for the introduction and for covering the forward-looking statement on Page 2. We released our earnings yesterday after markets closed, and today's presentation materials are available via the link on Page 3 of the earnings release. Turning to Slide 3, you'll see today's presenters and members of our executive management team. Joining me on the call are Mike Stewart, our President; John Martin, our Chief Credit Officer; and Michelle Keiowski, our Chief Financial Officer. Slide 4 highlights our footprint and financial scale. We now operate 127 banking centers, reflecting the addition of Southern Indiana following the First Savings acquisition. Total assets stand at $21.1 billion with $15.3 billion in loans and $16.5 billion in deposits. Adjusted performance metrics remain strong, including an adjusted ROA of 1.25% and an adjusted return on tangible common equity exceeding 14%, reflecting the underlying strength of our earnings engine. Turning to Slide 5. First quarter reported net income was $27.7 million or $0.45 per diluted share. Reported results included 2 notable noncore items. First, the legal close of First Savings acquisition on February 1 resulted in $17 million of onetime acquisition-related expenses. Second, during the quarter, we strategically repositioned $357 million of mortgage loans from held for investment to held for sale, and we expect to complete the sale of these loans by the end of the second quarter. These loans carry a weighted average coupon of 3.46% and the liquidity provided by their sale will be used to immediately pay down higher cost deposits and over time, will be deployed into commercial loans at a 6% plus yield. This repositioning resulted in a $29.8 million mark-to-market charge in the quarter with a tangible book value earn-back of approximately 4 years. Excluding these items, adjusted earnings per share totaled $1.03, up from $0.94 a year ago, representing 9.6% growth, driven primarily by net interest margin expansion and solid fee income growth. Our tangible common equity ratio remained strong at 9%, even after completing the acquisition and continuing disciplined share repurchases, including $24.9 million in the first quarter. Now Mike Stewart will discuss our line of business momentum.

Thank you, Mark, and good morning to all. Our business strategy is summarized on Slide 6. Building our Midwestern strength by growing organically remains our primary objective as a company. Our 4 primary business units work together in delivering financial solutions for businesses and consumers focused primarily on the maps you see on Slide 7. As Mark stated earlier, the first quarter was busy with the closing of First Savings Bank and the preparation for the May integration date. The legal close increased our overall loan portfolio size with organic growth relatively flat during the first quarter. After the strong fourth quarter loan growth, declines in our sponsor and investment real estate portfolio outpaced our C&I growth within our region banking markets. The portfolio declines were normal course payoffs that simply stacked in the quarter, sponsors selling their portfolio companies that we had financed or real estate projects that achieved secondary market takeouts. I expect growth in both these portfolios to resume in the second quarter. Our regional banking teams, inclusive of the new team in Southern Indiana, continued to deliver solid loan growth. It's very pleasing to see our Midwest economy continuing to expand, our clients' businesses continuing to grow and see our bankers continuing to win new relationships. New loan production during the first quarter for our real estate and our asset-based teams was at record levels and demonstrates the value of our diversified loan origination teams. While this quarter's organic growth was flat, I remain confident in our expected mid-single-digit loan growth through the course of 2026. Let's turn to Slide 8, deposits. During the first quarter, our core relationship-focused deposit franchise continued to show growth through the commercial, consumer and our Southern Indiana market. The bullet points below the table detail that, that total deposit decline came from public funds, consumer CDs and repayment of First Savings broker deposits. Each of these deposit categories is a higher cost source of funds as compared to the primary and operating accounts, which generated increases during the first quarter. Michelle will be reviewing net interest margin improvement during the quarter, which was a direct result of the disciplined deposit and loan pricing. Our continued deployment of new and enhanced products during the quarter. Our digital platforms wrapped with smart and effective marketing continue to deliver quality growth in our markets. Our people are our strength in meeting the financial needs within our communities. During the quarter, we added new teammates within our sponsor, investment real estate, community banking and private wealth teams to build on our brand and momentum. Before turning the call over to Michelle, one last comment regarding First Savings Bank. Our integration efforts are on track. The engagement of their team continues to be strong. On-site training and preparation for the May integration are advancing as scheduled. Our model of community banking in Southern Indiana has demonstrated its strength. Turnover of frontline personnel has been minimal. And as the prior pages demonstrated via the growth in loans and core deposits, their clients continue to be patient during the transition. The specialty verticals have continued to show consistent production in new business during the quarter. This production will continue to contribute to the fee income of First Merchants as the bulk of the originations are sold. I do want to highlight the SBA business model as a direct enhancement to the rest of First Merchants franchise. Having the ability to offer SBA product solutions to our clients is a natural extension of being a community and commercially focused organization. The new SBA team will be the fulfillment team for all of our existing consumer, small business and community bank teams. There are early successes that I expect to build post integration. I'm going to turn the call over now to Michelle to review in more detail the composition of our balance sheet and the drivers on the income statement. Michelle?

Thanks, Mike, and good morning, everyone. Slide 9 covers our first quarter performance, including 2 months of operating results from First Savings following the February 1 closing of the acquisition. There was meaningful growth in total revenues in Q1. Net interest income grew $12.2 million and noninterest income grew $2.5 million linked quarter. This resulted in a $6.3 million increase in overall pretax pre-provision earnings of $78.7 million. Tangible book value per share declined 2.8% linked quarter, but increased 7.3% over the same period in prior year. The linked quarter decrease was due to the impact of the acquisition and share buybacks. However, dilution from the First Savings acquisition at close was less than what we had estimated at announcement. Actual tangible book value dilution was only 2.4% versus 4.8% that we shared at announcement, and the tangible book value earn-back is now estimated to be 2.4 years. The difference was primarily driven by a lower interest rate mark, which totaled $53.1 million at closing. Slide 10 shows details of our investment portfolio. The bond portfolio declined from $3.4 billion to $3.3 billion due to changes in valuations and principal payments. First Savings had a $252 million bond portfolio that we sold at closing, creating liquidity for future loan growth. Expected cash flows from scheduled principal and interest payments and bond maturities through the remainder of 2026 totals $276.7 million with a roll-off yield of approximately 3.24%. We plan to continue to use future cash flows generated from the bond portfolio to fund higher-yielding loan growth. Slide 11 covers our loan portfolio. The loan portfolio yield declined by 23 basis points from the prior quarter to 6.09%, which was impacted by the lower day count in the first quarter and repricing of assets due to the Fed rate cuts in late 2025. During the quarter, new and renewed loans were originated at an average yield of 6.18%. The allowance for credit losses is shown on Slide 12. This quarter, we had net charge-offs of $10.3 million and recorded a $4.9 million provision. The transfer of $357 million of loans to held for sale reduced the loan balances requiring reserve coverage and contributed to a lower provision than the prior quarter. At closing, we also reported a $22.3 million increase to the allowance related to the credit discount on the First Savings loan portfolio. As a result, the allowance for credit losses totaled $212.5 million at the end of the quarter, representing a coverage ratio of 1.39%. Slide 13 shows details of our deposit portfolio. The rate paid on deposits declined meaningfully by 23 basis points to 2.09% this quarter. Our team strategically reduced deposit rates following the Fed's rate cuts late last year, resulting in a $4.6 million reduction in deposit interest expense in the first quarter even as deposits grew by $1.2 billion with the addition of First Savings. As noted on our slide, our noninterest-bearing deposits increased to 23% this quarter, up from 16% last quarter. This was driven by the redesign of our consumer checking account products. This change more accurately reflects the strength and quality of our deposit franchise. On Slide 14, net interest income on a fully tax equivalent basis of $157.7 million increased $12.4 million linked quarter and was up $21.3 million from the same period in prior year. Net interest income was positively impacted by a $1.2 million recovery from the successful resolution of a nonaccrual loan. As a reminder, we had a $3.3 million recovery last quarter. Our quarterly net interest margin of 3.35% increased 6 basis points from prior quarter despite the lower day count in the quarter, which reduced margin by 5 basis points. Our strong core margin reflected our continued pricing discipline. Next, on Slide 15 shows the details of noninterest income, which totaled $5.8 million on a reported basis and $35.6 million on a normalized basis. Customer-related fees were strong with quarter-over-quarter growth in wealth management fees and gains on sales of loans. Moving to Slide 16. Noninterest expense for the quarter totaled $125.1 million and included $17 million in acquisition-related costs. The acquisition costs were primarily incurred in the salaries and benefits and the professional and other outside services categories. First quarter expenses also included $1.1 million of annual benefit plan expense as well as a onetime charge of $900,000 for the write-down of the building. The cost synergies we expect to gain from the First Savings acquisition are on track and legacy First Merchants expenses are in line with the guidance I provided last quarter. Slide 17 shows our capital ratios. The tangible common equity ratio declined to 9% due to the acquisition and share repurchases. Since the beginning of the year, we have repurchased more than 700,000 shares for $27.6 million year-to-date. We remain well capitalized with the common equity Tier 1 ratio at 11.22% and are well positioned to support continued balance sheet growth. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.

Thanks, Michelle, and good morning. My remarks begin on Slide 18. This quarter, we streamlined the credit slides and moved the detailed loan portfolio trend page to the appendix for reference. In today's remarks, I'll focus on portfolio insights, asset quality and the asset quality roll forward, highlighting both the diversity and overall credit quality of the portfolio. On Slide 18, total loans ended the quarter at approximately $15.3 billion with overall credit performance remaining solid. C&I line utilization increased modestly to 51%, which we view as healthy borrower activity rather than stress. Our shared national credit portfolio totals about $1 billion across 90 well-diversified borrowers with no outsized single name exposure. In sponsor finance, outstandings are approximately $832 million, supported by strong credit metrics, conservative leverage and healthy coverage ratios. We remain disciplined on structure and intentionally underwrite with room for downside. Within CRE, retail is our largest exposure at $859 million and is largely credit tenant and triple net leased, performing as expected. Construction lending totals about $900 million across commercial and residential projects with continued emphasis on borrower equity and prudent underwriting. From a concentration standpoint, we remain well within regulatory levels with CRE construction at 40% of capital and total CRE around 181%, providing the flexibility to selectively grow while maintaining a strong risk profile. Overall, we are pleased with portfolio performance and remain focused on balanced growth and disciplined credit risk management. On Slide 19, let me briefly touch on asset quality. Our overall asset quality remains stable and our metrics are performing within expectations. As at quarter end, nonaccruals remained manageable with the largest relationship tied to income-producing real estate, including a $9.9 million multifamily construction credit and 2 office-related exposures totaling roughly $12 million. These credits are well known, clearly closely monitored and reflect areas of CRE we've been proactively managing. Importantly, we are not seeing broad-based deterioration across the portfolio. Credit issues remain idiosyncratic rather than systemic with no meaningful migration beyond a small number of relationships. Charge-off activity and criticized asset trends remain in line with expectations and reserve coverage continues to appropriately reflect the portfolio's risk profile. Overall, we are comfortable with asset quality trends and remain focused on early identification, active management and disciplined resolution where necessary. On Slide 20, turning to nonperforming asset migration. During the quarter, we added a $12 million nonaccrual office relationship, which was largely offset by a payoff of a $12.9 million multifamily construction credit. So overall, NPA levels remain well controlled with movement driven by a small number of individual credits rather than systemic deterioration. Resolution activity continues to progress as expected, and we remain focused on early engagement and disciplined management where stress arises. Taken together, asset quality and NPA trends reinforce our view that credit risk is contained and easily manageable. I'll turn it back to Mark to discuss our capital position and outlook.

Thanks, John. Good report. Turning now to Slide 21. Our long-term track record of shareholder value creation remains a key strength. Tangible book value per share has grown at a 7.5% compound annual growth rate over the last 10 years. Given the earnings enhancements created by First Savings acquisition and the modest balance sheet repositioning, I'm particularly pleased with the limited tangible book value dilution from year-end 2025 through March 31, 2026, which Michelle highlighted in her comments as well. It's just really pleasing to be at this point with what was a pretty modest tangible book value reduction and such strength in the earnings stream. It's a good place for us to be. Slide 22 highlights our 11.7% total asset CAGR over the past decade, reflecting a consistent strategy of organic growth complemented by disciplined value-accretive acquisitions that expand our demographic and geographic footprint. The First Savings acquisition is well aligned with this strategy and meaningfully strengthens our presence in a high-growth Indiana market. We look forward to building on our Midwestern strength throughout the rest of 2026 by focusing on our people, our clients, our products and technology. And it's -- I hope it's clear that organic growth is our top priority for the year. We're going to get through the integration on May -- mid-May, May 15. And -- and we've got great momentum with the First Savings team, as Mike Stewart highlighted. Thank you for your continued support and investment in First Merchants, and we are happy to take questions at this time.

And our first question comes from the line of Daniel Tamayo of Raymond James.

Maybe first just starting on the loan growth side. seasonally down in the first quarter. You had some -- the loan sale in there. Mike, you sounded pretty bullish on loan growth prospects going forward. Maybe just give us a little bit more color, if you can, on what's driving that, thoughts on paydowns, the timing of the slowing going forward? And if you're still comfortable with -- I think we talked about 6% to 8% growth for the year last quarter, if that number still holds.

Dan, I'll start with the yen. Yes, I do feel confident with that mid-single-digit growth rate and reaffirm. And what kind of what demonstrates that in my confidence level is you really take a look at our commercial pipeline. They're as strong as they have been historically. And what I tried to talk about there is in that first quarter, we just had some stacked normal course payoffs that were underneath what we would look at in a normal run rate of reduction, but the payoffs are a little bit higher. Remember, we also had a really strong fourth quarter and some of those anticipated fourth quarter payoffs didn't happen until the first quarter. But it's the investment real estate portfolio that was paying along with the sponsor book and both of those production levels were really strong during the quarter, and we'll see the growth come back into those business units. That community bank model, which is the core C&I that sits in our franchise, demonstrates a really good growth rate there, which is really fundamental for us. And another point of view that I'd just share is that I know where we stand as of yesterday. And that growth is coming through in a really strong manner. So if you look at how we think about normal course or known amortizations and what we think about known course of payoffs, it was just a little bit higher, but nothing unexpected out of the blue of people coming -- people leaving undue reasons. And the production level that we had, which is on pace for about $2 billion as we got it in the first quarter, just that we were stacked with some payoffs and feel really good about where the pipelines are, where those 2 business units are already driving record productions and bringing it into manifesting our balance sheet and then where I've seen our current April footing.

Mike, I'd love to just add, you made this in your actual comments earlier, but the paydowns really came exactly the way we would hope they would come, maybe not the timing. investment real estate moving into the secondary market, which is what we always expect and anticipate, which is great for credit quality. And then the sponsor book, exactly as you would anticipate that over time, that those sponsors liquidate those companies, sell them to maybe another sponsor, et cetera. But it's anticipated it was just a little more first quarter heavy than what we had expected.

That's exactly what I'm trying to say. Some of it we thought might have happened in the fourth quarter, it led over to this and some we might have had queued up in the second quarter, happen early because the secondary markets are good real estate.

Great. Very helpful. And maybe for Michelle on the margin, just curious where you see that moving going forward. You'll have the loan sale happening in the second quarter. I'm curious how you're thinking about the impact from that. I don't know if you gave more specific timing or you're able to yet other than in the second quarter. But just curious kind of how that impacts the margin and just overall thoughts for the rest of the year.

Yes. Well, I'll address the loan sale first. And so as Mark said in his comments, the loans that we're selling have a weighted average coupon of 3.46%. And so immediately, once we get that liquidity, we'll pay down some of our higher cost deposits. And I would say those are probably averaging about 3.80%. Over time, we will invest that liquidity in loans. And so of course, that will happen over the course of the next 18 to 24 months. And so we'll get some margin pickup over time, but it won't be immediate. so it will be a little more neutral right out of the gate. For margin over the next few quarters, just because the day count in Q1 always depresses our margin by 5 basis points. Once we get into Q2, Q3, Q4, we will see margin pick up a few basis points. if anything, just because of the day count and also just because I think some of the repricing from rate cuts last year, we've already seen some of that. I think deposit rates will be on rates that we pay on deposits will be relatively steady. And so I would expect there to be a few basis points of pickup on margin through the year.

Okay. So that's inclusive of the 5 basis points reversal, I guess, from the first quarter. So just, call it, a handful of basis points up from the first quarter level of margin? Yes, that's correct.

Our next question comes from the line of Russell Gunther of Stephens.

I wanted to see if you could touch a bit more on the deposit migration into noninterest-bearing this quarter, perhaps how you're thinking about the sustainability of the remix, whether you assume any runoff from the consumer product redesign. And then as a follow-up, Michelle, you touched on this a bit, but just overall cost of deposits going forward, assuming a Fed on pause, do you think you have the ability to flex that lower from here? Or is there kind of a slight upward bias to overall deposit costs going forward?

I'll start with the deposit account or checking account redesign. So we've migrated those customers to our newly designed checking accounts. And so we've been tracking whether there's any runoff. And it's been very stable and I think pretty well received. And so we're not anticipating any runoff. I would expect our noninterest-bearing to maintain that 22%, 23% level that we're seeing today. On the deposit rates, deposit rates are pretty competitive. And so I don't anticipate that we'll be lowering deposit rates meaningfully through the year. I would expect it to be overall more steady.

I'm just going to add a little bit more on that. So we worked at the end of last year to redesign our consumer core checking account. So now what happens is we don't have any paying small interest-bearing that all went to noninterest-bearing. So that's where the big shift if you look from the prior quarter is. And it is what I was trying to point out is our core primary account activity, I didn't talk about it, but both in units and in dollars continue to grow. So that new product set that we call PROSPER and PROSPER Plus is being well received in the marketplace with the new features and functionality with some of the new digital platforms, and it aligns then with how we want to represent it in noninterest-bearing deposits.

We're in year 2 of very strategically remixing the deposit base to be as core as possible with less dependence on CDs and public funds. And it just takes time, but we're really pleased with the progress we're making.

I appreciate all the color and nice to see. Maybe switching gears for me from a capital perspective, healthy levels of CET1 with the deal close. Do you have a sense of the potential impact from the Basel III proposal on RWAs and CET1? And then from an overall kind of capital return perspective, would you guys expect to remain active with the buyback here?

Well, on the -- we have evaluated the capital proposals. And I would say right now, our estimate is that it will benefit us probably somewhere between like 50 to 80 basis points, somewhere in that range. It's really driven mostly from some of the risk-weighted asset relief, particularly on the mortgage product. So that's our estimate at this time. And so we'll keep an eye on kind of where it gets finalized. From just capital management perspective, yes, we would -- given where our valuation is, we will continue to be active in the buyback space in the coming quarters.

Our next question comes from the line of Brendan Noble of Hovde Group.

Maybe just sticking with capital for a moment. As we all know, pro forma readings came in stronger than expected even with the repositioning of the mortgage portfolio. Totally get that you want to remain active in the buyback and loan growth is going to pick up here. But I'm just kind of curious if you see any other need for additional balance sheet optimization over the course of the year.

No. I mean, if you mean additional loan or bond sales, we're not anticipating anything else. We think this is kind of perfect for 2026. It gives us liquidity so that we can continue a mid- to high single-digit loan growth number that we talk about and allows us to stay really diligent with deposit pricing and just remix the loan book at this point from -- because we're cognizant of the loan-to-deposit ratio as well from lower-yielding loans in our portfolio with a little longer duration to higher-yielding loans with shorter duration. So at least in the coming months, I'm not anticipating anything further. We do evaluate all the time just what our options are. But really, we're pleased with the earn-back and especially the modeling of this, the way Michelle talks about it, is we just assumed our mid- to high single-digit loan growth would continue in a normal course is the way we budget for a couple of years. And then said if we redeploy this money, out of mortgages into commercial over a 24-month window, what kind of pickup do we have? And that's how the 4-year earnback was calculated. And so I'm pretty confident that we'll be able to accelerate some of that. And if -- and this year, we'll be using that liquidity for current loan growth. And so you can model it a lot of different ways. We think the 4-year earnback is the most conservative, but I just want to be sure everyone understands how we're thinking about it.

Yes. That's helpful color, Mark. Maybe pivoting to a question on First Savings. Now with the deal on the books and closed, can you just give us your latest thinking on how you view the 3 specialty businesses now that you've had time to see them in action? And I heard your commentary on SBA, but I guess I'm more curious about first lien HELOC and the triple net lease product.

Yes. It might be a good point to just reiterate how well the integration process is going. The connectivity of our teams is the best it's ever been in an acquisition. And I'm going to let Mike jump into that answer because Mike's never been closer on the ground to every single action that we're taking, especially in those verticals. But I'm really pleased with where we stand today and excited about getting through the integration and then moving forward and every day that we own the company, the more excited I am about the verticals.

Yes. Look, let's start with the triple net lease. Nice thing about since the end of the year through the close through now, their production has remained very stable, which is a good thing in my opinion. And they were originating the triple net lease on, I'll say, somewhat of a national basis and they would sell that portfolio or put it on the balance sheet. And it's an extension of investment real estate. It's an extension of what we understood that we really didn't focus on. So it feels natural for us to be able to continue to support how Tony and team is continuing to generate triple net lease businesses in originate model and gives us option to put it on the balance sheet if we so choose or sell. The first lien HELOC business is a unique business for us, and they built a really nice model that also has continued to have similar production levels as they were through this period of time. And that has been for them a complete originate and sell. We've got secondary buyers on that and secondary servicers. So it's a fee generation business that there is some of that on our balance sheet today. It was on their balance sheet. So we just kind of modeled that we'll keep our balance sheet flat for the first lien HELOC. And as they continue to generate new business, it turns into fee income, much like our current mortgage business originate and sell model. And like I referenced with SBA, they built a really nice infrastructure and ability to not only originate, but obviously underwrite and service and collect, which is just not a model that we have built. So they were doing around $100 million of SBA transactions last year. That first quarter production is actually higher than they were, again, during this noise period of time first merchants. and First Merchants SBA production last year was less than $10 million. So our infrastructure of small business banking and community banking looks to them as a new product set to continue to fulfill community banking and SBA products in our own backyard, which they really weren't overlapping with. So it's just a natural extension of actually probably bringing them more volume and letting them be the fulfillment team and whatnot. So that's how I'm viewing those 3 verticals, and we're watching it through integration day. And then my team here is regularly, what I call day 2. We're going to continue to figure out where do we want to go with growing the businesses or continue to incorporate into our core model.

And Mike, I think it's worth just adding, it's part of the reason we're so bullish about loan growth for the remainder of the year. The verticals are a really nice add. We've stayed exactly in the credit kind of profile and size that First Savings operated the business. But we do see opportunity to mostly just in the size of credits to start to make some adjustments, especially if you think about the triple net lease business, it is a lever that we could use. And so far, we've said, let's just maintain the growth profile and the size of each credit exactly the way it is. And I would just say it leans on the small side. So excited about how it can continue to help facilitate our growth in the future.

Our next question comes from the line of Damon Monte of KBW.

First question regarding the margin. Michelle, hoping you could give a little color on the expectation for the fair value accretion marks that we could expect going forward?

Yes. So for the first 2 months of us having the First Savings acquisition, I think we've recorded probably maybe $1.5 million of fair value accretion. And so that's on a 2-month basis. And so I would consider the run rate on a go-forward basis to probably be fairly similar.

Okay. Great. Okay. And then could you kind of give us a little guidance on the outlook for the combined expense base here in the second quarter as you get a full impact from FSG?

Sure. I think that reiterates the guide that I gave last quarter on legacy First Merchants. And so on the legacy First Merchant space, I had given guidance that we expected a 3% to 5% increase year-over-year. And then you add in First savings, but in the back half of the year, of course, recognizing the cost synergies that we're on track to achieve. And when you put all those pieces together, the quarterly expense total like on a quarterly run rate will probably be somewhere between $111 million to $114 million.

And you think that level is kind of like once the savings hit, so that's kind of like almost like an exit rate of in the fourth quarter?

Yes, yes.

Okay. Got it. Okay. Great. And then I guess just lastly, when you think about kind of just market disruption, broadly speaking, and opportunity to maybe pick up commercial lending teams, are there any plans to add to certain areas of the footprint? Or do you feel that the efforts you put forth in recent years is sufficient and you kind of have a good team at the table right now?

Dan, it's Mike Stewart. Yes, we look very opportunistically and very active right now strategically in overlap markets where being able to add quality talent in our markets would just augment our brand and growth. So we're very active in that space. especially I would say in the Michigan market, in particular, that being also said, I referenced that we've had just continued strategic hires along the way. That's part of our business model of 2026 and 6 new bankers to asset-based lending to investment real estate through sponsor, but more importantly, our core community bank with several more joining soon in treasury management, just continues to build. I feel like the infrastructure that's there. And that's not including what we've recently done in our private wealth group, which I think as you saw that, that had a really nice fee growth as we continue to win in that space.

Our next question comes from the line of Nathan Race of Piper Sandler.

Michelle, I was wondering if you could kind of just frame up fee income expectations for the second quarter and just generally are you still thinking kind of mid- or high single-digit growth for the full year and just what you're contemplating perhaps coming from First Savings, if you're thinking maybe that some of the verticals that you've discussed earlier, whether it's single-tenant lease or first lien HELOC could be a driver for some gain on sale revenue going forward, just given that I imagine those relationships don't really come with deposits.

Yes. So when you look at our Q1 normalized level of total noninterest income, it was $35.6 million. And so where I think about where that goes in the coming quarters, I would expect to get a full quarter -- a full 3 months of First savings with the expectations that we have on gains on sales of loans coming from those verticals as well as our mortgage business. I would expect Q1 to see a lift of about 3% to 4% in the coming quarters. So I think that's how you can think about what kind of lift you'll see Q2, Q3, Q4.

Okay. So 3% to 4% lift in the second quarter and then similar trajectory in the back half of the year?

Yes, yes.

Okay. Got you. And I jumped on late, so I apologize, John, if you could kind of touch on the drivers for the charge-offs in the quarter. Were there any kind of marked First savings loans that came through in some of those charge-offs? And just generally kind of how you're thinking about some resolutions of some of the NPA inflows from First Savings and just kind of the legacy resolutions as well going forward?

Yes. The charge-offs for the first quarter were really legacy First Merchants. There were 2 names, as I mentioned in my comments that came out of the portfolio, more idiosyncratic normal course kind of charge-offs. -- the regional bank and not of sponsored finance. It wasn't really driven at all by the charge-offs coming out of First Savings. So the asset quality there thus far, and it's early, has been fine. When I look forward to resolution, we run processes every quarter and assess what's in that NPA bucket and keep our eye on the level of actively working with borrowers to work out credits as well as any other strategic loan sale if we choose to go that direction. But for the most part, it's just normal course charge-offs that happened in the first quarter. It was higher. We had a couple of names that we've been working for some time that just finally came to ahead and move...

Got it. And assuming maybe charge-offs kind of normalize to the levels that we saw during last year, do you guys see a need to provide for kind of that high single-digit loan growth guidance that you reiterated and just kind of grow into your unallocated excess reserves? I know there's a number of inputs involved just given CECL and so forth. But just curious how you guys are thinking about maybe needing to provide for growth this year.

Yes. I mean, typically, we will -- we start with a goal of providing for our loan growth. And then it really just has to get adjusted based on the economic model. And right now, I think we're in a really good place when we look at kind of like the different economic scenarios that we run and kind of within that range.

Our next question comes from the line of Brian Martin of Brink Capital.

I just one thought on the -- Michelle, you talked about the roll-off rate on the securities. Just on the loans, can you just remind us now with FSSG, what's repricing over the balance of the year? And what type of pickup you get on what's coming due?

Yes. Well, I know one of the things that generally you're interested in, Brian, is on the fixed rate loans. And so like our fixed rate loan maturities, we've got about $100 million that matures at a rate of about 4.5% each quarter. And so there's definitely a tailwind there. And so -- and as you know, 2/3 of our portfolio reprices pretty much immediately with any rate changes. And so the rate changes that we had in the back half of the year, I feel like a lot of that asset repricing is already reflected in our overall portfolio yields.

Got you. Okay. All right. And then I think on the -- Mike, you talked about the -- just -- I was going to ask you about the people you hired, but it sounds like you've maybe hired 5 to 6 people recently. Just want to get a sense if they're already kind of included in the loan pickup or anything that's coming from them is not yet in kind of the run rate?

They're not in the run rate yet. I think we just smart first quarter additions. First quarter is typically a time when bonuses get paid and people that were actively looking to move, make that dissemination, and we were inune with that. So...

And I would add on top of that, Brian, in the guidance that I gave, I don't know if you recall my remarks when I gave the year-over-year increase on legacy First Merchants expense base of 3% to 5%. The reason why it's leaning a little bit higher than we normally operate is because we did anticipate hiring and adding to our commercial team and our private wealth team, which is what Mike is talking about. So that is built into the guidance that I provided.

Yes. And I started to mention earlier, I think we added 15 FTEs in that space last year, and we have 10 in the plan this year. So we're really pleased with the opportunity. The individuals that are available to us that are interested in First Merchants and their performance once they're on the team. But when Mike talks about the new 10 or so that we're hiring, we're not anticipating immediate performance.

Yes. And those -- you hired -- all those were hired in the first quarter or some of those hired last year?

No, 15 were throughout the year last year, a little more back end. And then we have 10 planned this year that...

I referenced 6 in commercial and 2 in private wealth, a couple of them also replaced those are this quarter. So we're all like we wanted to. So that production should start to see itself by the back half of this year.

Got you. Okay. And I think, Michelle, just kind of on the margin for a minute, given the day count and the change there, I mean -- and I know there was the $1 million of benefit. I mean is a jumping off point, maybe a little bit lower than where it ended, but you still maybe see a 4 or 5 basis point pickup just given the day count or 3 to 4 or whatever, something off of the current level that's how to think about kind of going into 2Q?

Yes. No, I think that's right. We will see -- I do expect to see that kind of pick up. And I would just say, I know we've talked about a lot of the pieces on our earnings. Overall, I feel like consensus is in the right place. I feel like it reflects what we expect to deliver this year. So I did want to make sure that I made that point to kind of reiterate consensus.

Got you. Okay. And then last 2 for me, just the tax rate. And then I think just there's some commentary recently about commitment to the SBA by the government. Just is that any -- I guess, maybe you said -- and I joined late, if you already talked about the SBA or any potential impact. Is there any thoughts that, that changes your outlook on the SBA business?

On the SBA, not yet. Our Chair, Jane Latoich, is in the SBA business and has their own company, that's what they do. And so it's -- we've had a really good understanding of SBA for a long time. We've now acquired a significant business in that space through First Savings. But we're -- we feel like we have a good handle on it, and we're excited about the future.

Okay. And Brian, just to respond to your tax rate question, 13% effective tax rate is what we would expect in normal -- on a normal quarterly basis 13%...

Okay. And I think you said, Michelle, the accretion is around -- is it around $3 million? Is that -- it was kind of breaking up when you were saying that. But I guess what the quarterly accretion you're thinking about with a full quarter in there, is that kind of the range of $3 million to $4 million type of number?

It won't quite be that high. It was $1.5 million over the first 2 months that we had first savings. And so I expect it to be a little over $2 million per quarter.

Just from your piece of...

Correct Yes. I mean the remaining pieces aside from First savings, it typically ran about $1 million or so, sometimes a little less depending on what we see.

Action.

I'm showing no further questions at this time. I'll now turn it back to Mark Hardwick for closing comments.

Yes. Thank you. My closing comments really are just to try to stay as high level as possible as we remain incredibly optimistic about the remainder of the year. And some of it, there's no way that you can see it. It's just what we see and what we feel is just the speed of play just keeps improving. I feel like the culture of our company is so strong. We have incredible teamwork and I feel like a sense of urgency that I haven't maybe felt in the past just throughout all the lines of business. People are just getting after it and producing results. And that also just includes our ability to handle something like First Savings for us to continue to run the business and to build great relationships and ensure an effective integration is an area where I'm incredibly confident. The drivers of our performance continue to be really good. Our balance sheet growth, as we've talked about, we remain optimistic, even though the quarter was flat, I feel great about the remainder of the year. Margin management is in probably the best place it's been in a while. It's been challenging since '23 since Silicon Valley, and I feel like we are in as good a spot as we've been in a while. Fee income has been growing double digits for really an extended period of time. And we were just kind of walking through all those categories that we disclosed in the slides and just the growth rates year-over-year we're all in the double-digit range. And then our expense control has been something we've been great at for years. So we've got adequate capital. It's allowing us to be active in the share repurchase space. If we're going to trade at these levels, then we're going to be active in buying back our own shares. And I think it just sets us up for a really strong '26 and kind of feeds into 2027. So I appreciate your investment in the company and happy to continue to have one-on-one discussions with any interested investors or current investors for that matter. So thanks for your time. We appreciate it, and we'll talk to you next quarter.

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

Thank you for standing by, and welcome to the First Merchants Corporation Fourth Quarter 2025 Earnings Conference Call.

Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the future performance and financial conditions of First Merchant Corporation and involves 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 and will be -- as well as reconciliation of GAAP and non-GAAP measures.

As a reminder, today's call is being recorded. I would now like to hand the conference over to your speaker today, Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

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 close. 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 recognized -- 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 now -- 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 -- and will actually close this weekend on February 1, 2026.

Now Mike Stewart will cover some of our line of business metrics.

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 of 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 nonmaturity balance growth. The full year results also reflect the growth in the mix of nonmaturity 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 I turn 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 and 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?

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 in AOCI recapture, increasing 20 basis points to 9.3% 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.

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 slowed 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 leverage 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 2.45%, 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 lines -- 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.

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 Instructions] Our first question is going to come from the line of Brendan Nosal with Hovde Group.

Maybe just starting off here on the topic of kind of balance sheet optimization. If I recall correctly, last quarter, I think you said you were looking at how you could optimize the sheet, short of a wholesale kind of raise restructure transaction. So can you just update us on what areas of the balance sheet you're looking at, what you would try to achieve those actions and what the parameters are around the existing capital base?

Yes. Thanks, Brendan. We are -- our line dropped right before the call started. And so if for some reason we drop again, just give us a little time to dial back in.

But we're continuing to evaluate the possibility of some type of balance sheet kind of repositioning. But I would say, as there's been some decrease in rates, the likely size of anything just continues to decline, which validates our decision in our communication in the last call that there would be no need to raise any type of capital. So whatever we do, it's going to be pretty modest.

What we have already settled on is that we do plan to sell the entire First Savings bond portfolio. It's about $250 million at close. And anything else that we do is really just focus on trying to take pressure off of liquidity. So -- or evaluating a small portion of our bond portfolio and some of our lowest yielding bonds as well as some of our lowest yielding loans. But whatever it is, it will be relatively small if we do anything beyond the First Savings bond book.

All right. Thank you. And we'll move on to our next question. Our next question will come from the line of Daniel Tamayo with Raymond James.

Thank you. Good morning, everyone. Maybe -- yes. Maybe starting on the loan growth side. It sounds like pipelines are pretty consistent from where they were last quarter. Loan growth was certainly a solid good story in 2025. Maybe you can give us a sense for your expectations for overall loan growth and where those categories that might be driving that loan growth in 2026 are?

Yes. This is Mike Stewart. I'll try to take that. Right, the pipeline, yes, it can remain consistent. So -- it's across the board when I think about geography or when I think about our segments, our C&I teams are focused on different size companies. They're all in a good position, engaged along the way, our investment real estate team. The new asset-based team that we talked about a couple of quarters ago has been off and running and producing fantastic results. And in this marketplace, it's a really good discipline to have that rounds out a lot of things we're doing.

So when I look at that loan growth, I feel like it's balanced to our segments and how we manage that and through the geographies as well. We might have even referenced about a year ago, we put some additional focus on our small business lending efforts through our consumer network. And that also, while not a large dollar amount, it just got good momentum across the board.

I will say that part of the strong fourth quarter, we had a couple of payoffs that didn't happen. So it ended our year a little stronger than I would have thought. So the first quarter though, when I think about outlook, I still feel it's going to be in that mid-single-digit level. Economy is good in the Midwest. And our teams, I feel like we can convert what we're doing.

Okay. So you said mid-single digit for the first year. I apologize if I missed it. Did you -- do you think that will carry through for the year as well?

That's the way I'm looking at it, sure. Yes.

Yes. I mean we're kind of mid- to high expectations for the year when you think about 6%, 7%, 8% is more how we think about the plan and consistent with what we delivered this year.

I think about the opportunities that can come our way when we're partnering with First Savings Bank, it's a new part of the state. So we get to work in new areas with their teams. And then they've got those verticals that we can continue to evaluate how we want to originate and sell portfolios or continue to utilize our balance sheet. So we've got some nice levers.

Okay. Great. And then maybe one for Michele on the deposits. If you have the CD repricing schedule over the next 12 months and the balances and yields?

Yes, I do. So really in the first 2 quarters of 2026, we have about $800 million of CDs that are maturing. And the weighted average rate on those CDs, it is higher than our current specials. And so first quarter, that weighted average rate is like a [ 3.75% ]. Second quarter, it's like a [ 3.65% ]. Currently, our 12-month CD that we're offering is at [ 3.30% ] and the 9 months is at [ 3.45% ]. So we'll get some nice pickup of some savings on interest expense there.

In the third quarter, we've got another -- it's under $400 million that will be maturing. And those -- that weighted average rate is really in line with our special currently. And so that -- and then there's just really not a whole lot in the fourth quarter. So hopefully, that gives you kind of the color you're looking for.

Yes. That's fantastic. And then one for you, Mark. Just on operating leverage, your thoughts around your ability to achieve that, I guess, probably the easiest way to look at it on an organic basis unless you wanted to include the deal and what might be problematic or potential issues or benefits to achieving that?

Yes, it's a great question. On our core, we were pretty aggressive with the '26 plan about just continuing to invest in people. we added about 15 FTEs in '25 that were -- added about $4 million of total expense. And in '26, we committed to another 10 that are part of the sales force, another $2.5 million or so. And you can see some of that coming through in the fourth quarter.

And so we're just finding opportunities to add talent that we're really excited about. And I would say if it were just stand-alone, maybe we'd be a little bit more conservative, roll-up refining the talent that we're adding and just feel like it's consistent with the market opportunity. And so on a core basis, operating leverage was going to be a little less impressive, I guess. And maybe last year, we did a hell of a job, I thought adding operating leverage in '25.

But most of it is just because of the strength of the acquisition. We're going to continue to add a real positive kind of operating leverage entity in '26. And on a combined basis, I think we're going to produce the kind of results that you're used to seeing from us. And so we're pretty bullish about the growth of net interest income and fee income. And you have the -- how those numbers exceed any expense additions that we'll have on a net basis when you consider First Merchants, First Savings, less all of our cost takeouts for the year. So we're looking closely at all the estimates that all of you have and feel comfortable with those numbers and feel like those are -- there are EPS targets that we can meet or exceed.

Our next question comes from the line of Damon DelMonte with KBW.

Hope you're all doing well today. Just had a question on expenses and kind of the outlook there. Michele, could you give us a little guidance of kind of how you're thinking about kind of a core expense base for First Merchants given some of the moving parts in the fourth quarter? And then how we should kind of think about the first partial quarter with FSFG coming on board?

Well, on a core basis, just looking at year-over-year noninterest expense, we now budgeted to increase -- well, between 3% to 5% for the reasons Mark just indicated, the addition of talent. And then, of course, we're adding First Savings, their operating expense with -- that closed on February 1. So that will bring on 11 months of operating expense. But just as a reminder, we have 27.5% cost annualized cost savings. So we've estimated that we think we can fully realize once we get past the integration. And so our integration is scheduled for May. And so I think we'll be able to realize those cost savings more in the back half of 2026.

Yes. And I wanted to just add when I talk about some of the additions of talent. Just a reminder that back in '23, we completed or announced a voluntary early retirement. And at that time, we had about 2,145 employees. And today, we're about 2,035. And so that 5% reduction we've been able to hold on to even with the addition of talent. And on a core basis, expect to add less than 2% to the FTE base, and just excited about the quality of talent that we're bringing on to the company.

Got it. Okay. Good color there. And then with respect to the margin, Michele, did you say that there was a benefit of $3.6 million from interest recoveries on nonaccruals?

There was, yes. And when I look at core margin -- go ahead. Sorry, Damon.

Yes, I was going to dovetail that into core margins. So go ahead.

Yes. Just looking at year-over-year, we've built one rate cut in our plan that we had built in early in the year. And so on a core margin basis, we did expect that margin in 2026 would compress a few basis points. We do think that we'll be able to get some momentum on repricing deposits, which will help offset some of the asset repricing that occurs because of the commercial nature of our loan portfolio. But on a net interest income basis, we definitely expect to see growth year-over-year.

Got it. Okay. Perfect. Okay. Great. That's all that I had. I'll step back.

Our next question comes from the line of Nathan Race with Piper Sandler.

Maybe on fee income, nice growth quarter-over-quarter in 4Q. I'm just curious how you're thinking about the opportunities to grow some of the fee lines in 2026, just given the momentum in fourth quarter and some of the ongoing areas that you guys are trying to grow? I think in the past, Michele, maybe we're talking mid- to high single digit range, but just curious if that's still a good expectation versus kind of the 4Q level?

On an noninterest income basis for 2026, I mean we feel like we can get double-digit growth there. And so we're planning 10% growth. And some of that comes from some of the investment people that we have. We think we'll have some great momentum, both in our wealth management space as well as our treasury management. Mike, I don't know if you want to add some color?

Treasury management, some of the investments we're seeing with our derivative product group, that will add. What we've done on the consumer side with how we're positioned there, that fee income should continue to be -- that won't be double digit, but that adds to that total. And then by the -- again, when you get past our integration, the fee income, the opportunity that sit with our acquisition, also originating sale with the mortgage side, originating to sell to some of their products and services or their specialty groups is additive.

Yes, definitely. And just to clarify that double-digit growth expectation for this year, is that inclusive or not including FSFG?

We think we'll have double-digit growth even on a stand-alone basis.

Okay. Great. Good stuff. And then maybe a question for Mike. There's obviously been some notable M&A announcements with some of your larger Midwest competitors recently. So just curious if you're starting to see maybe some M&A-related disruption permeate through the loan pipeline these days? And maybe just any expectations in terms of how some of those competitors may be more focusing on the South can impact both opportunities to add talent on the commercial side of things and then anywhere else across the company?

Yes, that -- specifically, we're thinking about -- I'm responding to you in our Michigan market where you've got Fifth Third and Comerica, we view it as opportunity. When I think about the pipeline, yes, there's already early conversations happening with clients, with our teams and maybe other outside banks, too. But our teams that might be a little sensitive to moving from 1 bank to the new bank or experiences of the past or making sure they've got alternative plans ready to go. So the conversations are happening, so that's a positive.

I do feel like there's an opportunity to augment teams. That's probably -- that comes later. I think they've done a nice job of ensuring that they've got their arms around individuals and give them big hubs, as they should. But those type of disruptions and the change [ is meant ] happen in the back end, we'll be positioned because we know who that is. We understand the talent that we think would be great to add to our team, and we're already having conversations there as well.

Don't know from a consumer point of view, I don't know yet how we can play to some banking center augmentation and adding to our footprint, but we're evaluating that as well with Michele. So opportunity, for certain.

Got it. That's really helpful. And then maybe one last one for Mark. On buybacks, obviously stepped up in the quarter. And I think the valuation is still quite compelling with where you guys trade relative to peers. So just curious if we can expect the pace of buybacks to step up in 2026? Or do you think what we saw in 2025 is a good approximation for this year?

Yes, if we continue to trade kind of below average, I guess -- I mean, it's an opportunity that we'd like to take advantage of, and we have the capital base to do it. So I don't have any desire really to see our TCE grow above the current levels. When we close the transaction, we'll see a decrease from that kind of 9.40% level, more like 8.70%, 8.80%, but still well above our target of 8%. And so we intend to be aggressive with buybacks as long as the price holds where it is. So I prefer the price to be up. And we didn't take advantage of it, but if this is where we are, it's the right thing to do.

Our next question comes from the line of Brian Martin with Janney Montgomery Scott LLC.

Maybe, Michele, just back the margin for just a minute. The core margin in the quarter ex that onetime item, kind of what was that? And then just remind us of kind of the normal seasonality that you'd expect in 1Q, I guess, as we think about it, I guess, kind of absent FSFG.

Well, core margins for the quarter, the interest recovery did add several basis points. So our core margin is probably about 8 basis points to core margin. And then to your question about what we would expect in Q1, because of the commercial orientation of our loan portfolio, the day count in Q1 always has a pretty significant impact. And I think last year, it ended up being about 5 basis points. And so when you look at the trend of margin, the seasonality definitely takes a dip in Q1, and then obviously rebounds later quarters. But overall for the year, we would just -- the overall annualized margin, we would expect just a couple of basis points of compression, assuming that we get a Fed rate cut in 2026.

Okay. And the -- can you just remind us kind of the impact of FSFG on the margin overall?

Yes. once we pull the deal in, particularly because of the impact of some of the interest accretion, you will see that give our margins some lift.

Got you. Okay. All right. And then just on the expenses for a moment. Just the kind of the integration occurs in May. Third quarter should be a pretty clean quarter then from an expense standpoint?

Yes, it should be.

Okay. And then just how are you thinking about bigger pictures you get later in the year, to Mark's comment, or the other comments earlier about operating leverage? Just kind of where -- the efficiency is at a pretty nice level here at 54-ish. And as you kind of get into the back -- the fourth quarter of the year, can you kind of be around that level? I guess, what's kind of the bigger outlook on efficiency as far as where you get to as you start to capitalize on some of the cost savings?

Well, I think our efficiency ratio will continue to be under that 55% level, and we should have really good operating leverage, I think that it should continue to grow in Q3, Q4 for sure.

Okay. So maybe being -- you're below the 54% or below the current level in the fourth quarter of '26. Is that how we should think about it as we kind of hold everything in?

Yes. I mean our goal is always to be below the 55% level, and we'll definitely be below that in each quarter. Yes.

Got you. Okay. And then just last two for me, was just on the -- you gave the CDs, Michele, but just in terms of the fixed rate loans repricing, I think you said there's still some tailwind just given where your pricing is. But what -- can you remind us what's repricing on the loan side in '26?

Yes. We had -- I believe it was 300 -- about $350 million of fixed rate loans that are going to be maturing in 2026. And they were at like a [ 4.40% ] rate. And so there's definitely some repricing upside there.

Yes, some tailwind. Okay. And then lastly, just was the tax rate. Still, I guess, how are you thinking about that? I think it's still around 13% or 13.5%, -- is that kind of a decent level to think about? Or...

Yes. Good question. On a core basis, we would expect it to be about 13%. I think once you add in the deal and all of the financials on a combined basis for '26, it will probably come in a little bit lower because of the transaction costs and such. And so I would expect it to be more like 12% for 2026 on a combined basis.

Our next question comes from the line of Terry McEvoy with Stephens Inc.

Maybe a question for John. The multifamily construction, it was kind of mentioned, the NPL formation and then the payoff. So I guess my question is, what are you seeing across that $400-plus million portfolio? And then as a follow-up, based on your outlook today, is charge-offs kind of $6 million to $7 million, like you saw in the third and the fourth quarter, is that -- are you comfortable with that run rate over the near term?

Yes. So when I think about the multifamily portfolio, it's generally in pretty decent shape. We have had a couple of names that as a result of the higher interest rates and quite frankly, just this agreement amongst partners and the strategy there, but I'm kind of fallen out, the 2 names that -- 1 that went in, 1 that came out were examples of it. But it's not some wholesale problem. For the most part, we've seen those assets stabilize and move into the permanent market. When I think about charge-offs, I think about it in that 15 to 20 basis points, about, say, depending on what we have any individual quarter. So yes, that 6 to 7 is probably about the right number.

Great. And then maybe a follow-up. Mike, you kind of ran through the positive consumer deposit trends and Michele talked about the success lowering rates. When I look at the decline in commercial deposits, ex public funds, is that a good sign for loan demand or commercial loan demand in 2026? Or is that just seasonality? And I'm reading too much into it?

Well, there is definitely a correlation with line of credit usage and businesses using their cash to fund and finance. So there could be seasonality in it. That seasonality usually comes more from the product fund side with tax receipts grow and tax payments go out, and you see that in the second and fourth quarters.

When I think about the business flow in the core operating accounts, we penetrate relationships really well. And I do think it's a part of the working capital cycle. So when we do see revolver increases, I mean, John had a slide that showed them pretty flat, but my comments also talked about the draws that are happening under construction real estate, which also means they're using their cash into projects. So I do think it's a corollary to loan growth with where they're utilizing their excess funds.

We have a follow-up question from the line of Brian Martin with Janney Montgomery Scott.

Just one follow-up, guys, I forgot to ask. The -- and just Mark, your comments about the outlook for this year, just given the valuation where the stock is at and the buyback, what does -- how does M&A fit into that? I mean, obviously, it seems like you have your hands full with the transaction, a lot in front of you. But in what valuations at, does it feel like the buyback is a better use of capital today than considering M&A, and that's probably the way to think about near term and we'll see where things go? Or how are the dialogue on M&A today?

No, I think you summed it up well. We're focused on the acquisition in front of us, and we do think that using our capital to continue to repurchase shares at the current price level is the best short-term strategy for sure. So we're really not spending much time thinking about what's next on the M&A front.

Got you. Understood. I just wanted to confirm. Thanks, Mark.

Thank you. This concludes today's Q&A session. This also concludes today's conference call. Thank you for participating. Everybody, have a great day. You may now disconnect.

Thank you for standing by, and welcome to the First Merchants Corporation Third Quarter 2025 Earnings Conference Call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the 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 a reconciliation of GAAP to non-GAAP measures. 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.

Good morning, and welcome to First Merchants Third Quarter 2025 Conference Call. Thanks for the introduction and for covering the forward-looking statement on Page 2. We released our earnings yesterday after the market closed, and you can access today's slides by following the link on the third page of our earnings release.

On Page 3 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, Michele Kawiecki.

Slide 4 has a map with all 111 banking centers, a few awards that we've received recently and some Q3 financial highlights, including a 1.22% return on assets for the 9 months ended September 30, 2025. On Slide 5, our strong balance sheet and earnings performance reflects strength and resilience of our business model. We delivered another 9% loan growth quarter and $0.98 of earnings per share.

ROA totaled $122 the same as our year-to-date number I mentioned previously, and the efficiency ratio was 55%, which is consistent with the high performance we strive for. As you all know, we announced the acquisition of First Savings Financial Group on September 25, adding approximately $2.4 billion in assets and expanding our presence into Southern Indiana, which is part of the Louisville MSA.

We are confident in our ability and excited about building on their meaningful deposit franchise to create a true community bank in Southern Indiana, much like we've done in previous acquisitions. Citizens Bank in the Northwest part of Indiana and IUB in Fort Wayne are 2 great examples of acquisitions where we saw potential and successfully built them into high-performing parts of the First Merchants franchise over time.

We also believe that our verticals will prove beneficial by enhancing fee income through their originated sell models for SBA loans and first lien HELOCs, by adding an additional loan growth and liquidity lever through their triple net leasing business, and we will now have an SBA product offering available throughout our current footprint. You may know that we have completed $8 million of SBA originations so far in 2025, while first savings has originated over $100 million.

Our commercial and small business teams are excited to finally have a more robust offering for our communities. Larry Myers will be joining our Board of Directors upon the close of the acquisition, and Tony Shane will stay on board to lead their verticals and enhance the financial expertise of our commercial team.

We anticipate a mid first quarter closing a mid-second quarter integration and are confident in achieving the announced 3-year earn back.

On Slide 6, year-to-date net income totaled $167.5 million, an increase of $31.9 million or 23.5% from the 9 months ended 2024, while earnings per share totaled $2.90, an increase of $0.59 or 25.5% during the same period. Michelle will discuss our capital position to include our tangible common equity of 9.18%, which provides meaningful capital flexibility and John will discuss nonperforming asset data to include our 90- or NPA plus 90 days pass through to total loans of just 0.51%, down from 0.62% a year ago. Now Mike Stewart will discuss our line of business momentum.

Thank you, Mark, and good morning to all. Allow me to share some context for my portion of this call. I'm calling in today from Charleston, South Carolina, where the first Savings Bank SBL team is gathered. SBL stands for Small Business Lending and represents first savings bank's dedicated 45-person team that has a national footprint delivering SBA loans. They gather once a year in person, to review their accomplishments and prepare for their upcoming year, and I am pleased to be able to meet this team later this morning as an early bridge to the integration with First Merchants.

So back to our earnings call. The business strategy summarized on Slide 7 remains unchanged. We are a commercially focused organization across all these business segments and our primary markets of Indiana, Michigan and Ohio.

So turning to Slide 8. And 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. $268 million in commercial loan growth for the quarter, over 10% annualized. $699 million of loan growth year-to-date, over 9% annualized. CapEx financing, increased usage of revolvers, M&A financings and new business conversion are the drivers of this growth.

Another encouraging 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 our loan growth and increasing market share activities into the fourth quarter. The Consumer segment also shared in the balance sheet growth with residential mortgage, HELOC and private banking relationships driving the $21 million of loan growth for the quarter. Pipelines for these segments also ended at consistent levels to June.

So we can turn to Slide 9, deposits. I will start with the Consumer segment on the bottom page which was the driver of our deposit growth during the quarter, $96 million in total. The mix is particularly pleasing with the nonmaturity categories growing at nearly 5% annualized Maturity categories also grew by $27 million. The primary driver of the nonmaturity balance increase is market share and household growth.

Note the last 2 bullet points on this page. Maturity deposit balances have decreased $198 million year-to-date with nonmaturity deposit balances increasing by $178 million. Commercial business segment on top of this page has a similar story, while total deposits declined by $23 million in aggregate, core relationship or operating account balances grew by 4.9% or $56 million.

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 gratified with the active engagement our teams are having with their clients. We have continued our pricing discipline, specifically maturity deposits and public funds and remain hyper focused on relationships and converting single-product users into a broader bank relationship.

So before I turn the call over to Michelle, one last comment regarding First Savings banking. I'm excited to be working directly with them. Larry, his executive team and his Board have been welcoming and supportive of building their market presence in Southern Indiana with first merchants as a partner. I have already spent time with their teams, visiting banking centers and meeting their clients. They have a strong reputation within Jeffersonville, New Albany and their Southern Indiana footprint. Their community bank model and reputation are well established.

Continuing their growth within this community will be our priority as their branch network and commercial capabilities are well positioned. Being able to meet their SBL team and other verticals is also a priority for me as these businesses drive a solid fee generating revenue stream for the bank.

So Michelle, I'll let you take it from here.

Thanks, Mike, and good morning, everybody. Slide 10 covers our third quarter performance, which reflects positive trends in all categories. Total revenues in Q3 were strong with meaningful growth in both net interest income of $0.7 million and noninterest income of $1.2 million. This resulted in overall pretax pre-provision earnings of $70.5 million.

Tangible book value increased 4% linked quarter and 9% when compared to the same period in the prior year. Slide 11 shows our year-to-date results. The first 3 lines highlight continued balance sheet growth alongside an improved earning asset mix. Over the past 12 months, we reduced the lower-yielding bond portfolio by $280 million and increased higher-yielding loans by $927 million. Reviewing lines 11 through 14, total revenue increased by 4.5% when comparing year-to-date 2025 with the corresponding period in 2024 while expenses remain unchanged, demonstrating positive operating leverage.

Adjusted pretax pre-provision earnings increased by 4.7% and totaled $208.6 million year-to-date 2025. Slide 12 shows details of our investment portfolio. Expected cash flows from scheduled principal and interest payments and bond maturities over the next 12 months, totaled $283 million with a roll-off yield of approximately 2.18%. 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 continued to expand, increasing 8 basis points from the prior quarter to 6.4%. The -- this increase was primarily driven by loan originations and refis during the quarter had an average yield of 6.84%. The allowance for credit losses as shown on Slide 14. This quarter, we had net charge-offs of $5.1 million and recorded a $4.3 million provision. The reserve at quarter end was $194.5 million and the coverage ratio of 1.43% remained robust.

In addition to the ACL, we have $14.4 million of remaining fair value marks on acquired loans. When including those marks, our coverage ratio is 1.54%. Slide 15 shows details of our deposit portfolio. The total cost of deposits increased 14 basis points to 2.44% this quarter, reflecting the competitive deposit dynamics in our markets. We expect the rate pay down deposits to decline as a result of the September rate cut and plan to reduce rates more assuming there are cuts in October and December.

On Slide 16, net interest income on a fully tax equivalent basis of $139.9 million increased $0.7 million linked quarter and was up $2.9 million from the same period in prior year. Our quarterly net interest margin of 3.24% was stable linked quarter and continues to be resilient.

Next, Slide 17 shows the details of noninterest income. Noninterest income totaled $32.5 million with customer-related fees of $29.3 million. Customer-related fees were strong in all categories, reflecting continued momentum.

Moving to Slide 18. Noninterest expense for the quarter totaled $96.6 million and included $0.9 million of severance and acquisition costs. When excluding those onetime charges, core expenses were $95.7 million and in line with our guidance from last quarter. The core efficiency ratio remains low at 54.56% for the quarter.

Slide 19 shows our capital ratios. The tangible common equity ratio benefited from strong earnings and AOCI recapture increasing 26 basis points to 9.18% while returning capital to shareholders through share repurchases and dividends. During the quarter, we repurchased 162,474 shares totaling $6.5 million, bringing total share repurchases year-to-date to 939,271, totaling $36.5 million.

We remain well capitalized with a common equity Tier 1 ratio at 11.34% and are well positioned to support continued balance sheet growth. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.

Thanks, Michelle, and good morning, everyone. I'll begin with an overview of our loan portfolio on Slide 20. In Q3, we saw robust loan growth across the portfolio with a $289 million increase in total balances quarter-over-quarter or 8.7% annualized.C&I lending grew by $169 million this quarter, continuing its strong momentum from last quarter. Commercial real estate added $87 million, reflecting steady demand and disciplined execution. We continue to be well below the CRE regulatory concentration guidance and with the pending FSB merger, we have ample room for new originations in the portfolio.

Our Midwest footprint remains the core of our portfolio with 82% of borrowers located in our 4-state region.

Turning to Slide 21. Our sponsor finance portfolio continues to perform well with $911 million in outstandings across 100 companies in diverse industries. The credit metrics in this portfolio remains solid with 85% of the borrowers having a senior leverage under 3x and 63%, maintaining a fixed charge coverage ratio above 1.5x.

Losses have remained nominal over the life of the portfolio with only $15.1 million in losses over a 10-year history with nearly $2 billion in funded loans. We also continue to manage our shared national credit exposure prudently with $1.1 billion across 94 borrowers primarily in wholesale trade, agriculture and manufacturing.

Underwriting and credit quality remains strong across consumer and residential mortgage portfolios with over 96% of our $727 million in consumer loans and more than 91% of $1.9 million in residential mortgage loans originated with credit scores above 669.

Turning to Slide 22. We -- our investment real estate portfolio now stands at roughly $3.1 billion, as shown above, with the more significant concentrations highlighted here on Slide 22. We -- within nonowner-occupied office, we continue to monitor our exposures with the top 10 loans representing 53% of total office exposure with a weighted average 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% loan to value.

The second largest is a $24.1 million medical office facility.

Turning to Slide 23. Asset quality remains solid with nonperforming loans declining 3 basis points from $72 million to $68.9 million. Our nonaccrual loans tend to be small and granular, the largest being $12.9 million to a multifamily secured loan. Classified loans finished the quarter lower with improvements across the C&I portfolio. Our charge-off -- our net charge-off for the quarter were 15 basis points of average annualized loans. Performance was strong coming out of the second quarter and resulted in a solid performance for the portfolio in the third quarter.

Then turning to Slide 24. Closing out the nonperforming asset roll forward highlights the strong performance just mentioned. We added $15.5 million on Line 3 in various nonaccrual loans largest was a $4.3 million contractor. We resolved the $6.8 million brewery relationship from last quarter, which is included in the $9.4 million on Line 3. With a $6.5 million or with $6.5 million in gross charge-offs on Line 5. We added $1.3 million in OREO from the mortgage portfolio and had $2.5 million decline in 90 days past due. Overall, our credit portfolio continues to perform well as we continue to use consistent underwriting and proactive credit risk management. I appreciate your attention, and I'll now turn the call back over to Mark Hardwick.

Thanks, John. Turning to Slide 25. 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 buybacks and post acquisitions. When adjusted for the AFS AOCI volatility, which is now at $2.72, the combined annual growth rate is actually 8.5%.

And then differential back in 2002 was nearly $4 per share. So we've made up some ground as the portfolio has matured and as rates have changed slightly. Slide 26 represents our total asset CAGR of 11.5% during the last 10 years and highlights how acquisitions have improved our footprint and helped fuel our growth.

As we look forward to the last couple of months in 2025, we expect more of the same strong performance. Thank you for your attention and your investment in First Merchants. And at this point, we're happy to take questions.

[Operator Instructions]

Our first question comes from Damon DelMonte with KBW.

Hope you're all doing well today. Just wanted to start off with kind of the expense outlook. I know going into '26, it gets a little confusing because of the merger closing at the beginning part of the year. But just kind of wondering, Michelle, your thoughts on kind of core expenses here in the fourth quarter and kind of what you anticipate for core growth as we look through '26?

Yes. Well, I'll start with the fourth quarter. We would expect Q4 to be relatively in line with Q3 and that is, I'd say, after you back out those onetime expenses. And so really looking at Q3 core expenses, we always use Q4 to true incentive accruals and such, but not expecting any meaningful increase. So we should have a pretty disciplined finish to the year.

And we're going through our planning process for '26 right now. And so we'll be more prepared to give guidance, I think, on our next call for 2026.

Got it. Okay. And then with regards to the margin, nice to see it hold up pretty steady quarter-over-quarter. Can you help us think a little bit about the impact if we do have 2 rate cuts here in the fourth quarter? And kind of remind us how the margin is kind of positioned for future cuts?

Yes. I mean, assuming we get rate cuts in October and December, I would expect to see a few basis points of margin compression in Q4 as I've shared before, if there are rate cuts, our ALCO model predicts that for each 25 basis point cut, our margin decline is about 2 basis points. And of course, that's because 2/3 of our loan portfolio is variable rate. So it will -- the loan yields will decline. But we're actively moving rates paid on deposits down in response and if you look back at last year, we were really successful in doing so at that time. And so we'll have to see what the deposit dynamics in the market are like, but we're hopeful that we'll be able to try to minimize the compression as much as we can.

Okay. And just kind of along those lines, it looked like the deposit costs were up this quarter. Any color on kind of what occurred during the quarter?

Yes. We really had to juice up some of our specials in order to stay competitive. And so I feel like that's the primary driver.

Got it. Okay. That's all that I had for now.

Damon, I would just add, we had fixed loan growth. We needed to make sure that we have the funding. On the other side and decided that it was worth being a little more aggressive with specials this quarter.

Yes. Got it. Yes, it makes sense. Makes sense. Okay. I'll step back.

Our next question comes from Nathan Race with Piper Sandler.

Just going back to the deposit pricing and cost increase in the quarter. Just curious if you're seeing any rationality or improvement from a competitive pricing perspective these days now that we have the site cut from last month and likely 1 or 2 more in the fourth quarter. And just can you remind us how much in the way of kind of managed your exceptional rate deposits you guys have that can reprice following those cuts in the future as well?

Yes. With the September rate cut, we've been watching the market closely. And I wish I could tell you that we see some of our competitors backing off of rate. But I got to tell you, it's still feels pretty high. So we're hopeful that with this next one, we'll start to see competition get a little more rational. We have probably about $2.5 billion in deposits that are indexed but as Mike Stuart covered in his remarks, even on our consumer portfolio, we're a little more variable than we were even at this time last year.

And so we'll be able to -- we'll have the ability to move pricing on a pretty good chunk of deposits down. We already have with the September rate cut, and we think we'll have the ability to do more over the next 2, assuming we get those before the end of the year.

Okay. That's helpful. And then just thinking about the impact from First savings. I believe you're picking up around $700 million or $800 million portfolio kind of lower yield even single tenant lease finance loans. So just curious how you feel about that asset class. Is that portfolio you want to grow in the future? Or do you think there's an optionality to maybe sell that book just to maybe reduce kind of the rate accretion that would be associated with marking that portfolio to market upon closing? And just any other thoughts on maybe repositioning part of the legacy First Merchant Securities portfolio with the cover of the deal closing in 1Q?

Yes, Nathan, good question. I think what I love about the triple net lease portfolio is we have optionality. So if we continue to feel bullish about loan growth in the core bank or in the legacy bank, First Merchants at a 684 kind of yield like we had this quarter. And if the rate cuts, obviously, that will come down. But the triple net lease portfolio is marked to about 6.25% and it's fixed rate. So it kind of just depends what our loan growth looks like in the variable rate portfolio and the yield differential and we know that we have outlets if we wanted to sell a portion of it.

And yes, we're always looking at the rest of our balance sheet. We have some mortgage loans that are yielding a little over 4.5% and some public finance loans that are in the same place and then the bond book. And so we're always just trying to look for opportunities to take advantage of shifting that liquidity into a higher-yielding asset.

Got you. And it seemed like a pretty opportunistic addition to add for savings. But maybe, Mark, just curious if you can touch on future M&A ambitions into next year. You've seen more opportunities to maybe consolidate some subskill base across your footprint or you just going to be more focused on kind of the organic runway that you have in front of yourselves.

Yes, I would say we're busy. I look at at the talent that I have within our organization and just performing organically and then throwing on top of that, the acquisition that will require time and energy to do it right and the opportunity that exists still in our Detroit MSA as well as now the Louisville MSA. I don't feel like M&A is a priority. We're in a position where we have the one we were looking for and the one we were most interested in, we love our geographies.

And at least for now, that's 100% of our focus. And I would just add the Comerica third announcement. This is an opportunity for us, and we're actively looking at how we take advantage of that. And so I know every time we have an acquisition, competitors do the same thing in the markets that we're moving into. But we're very aware of the 50-plus commercial bankers in that marketplace. We're very aware of the 24 locations that are within a mile where there's overlap. And would love to find a way to turn the first merchants into a more meaningful franchise than it already is in the Detroit MSA as Fifth Third and Comerica come together.

Yes. My follow-up question on Detroit specifically, it seems like you're really well positioned there, particularly given that I think a lot of the Level 1 commercial bankers came out at Comerica way back when. So I appreciate the color.

Yes, it's interesting. I was talking to Pat Ferring, who is the CEO of Level 1, and he said his phone has been ringing off the hook and so he's been helpful in helping us figure out the best way to approach the disruption. So thank you.

Our next question comes from Daniel Tamayo with Raymond James.

Thank you. Good morning, everyone. Let's see. The loan growth was very strong this quarter. You've talked about it, particularly on the C&I side. You've had significant momentum there over the last few quarters. I think you said pipelines are pretty stable. Does this feel like -- I mean I'm looking at 14% loan growth on a year-over-year basis in the C&I space. Does this feel relatively sustainable to you guys for the next few quarters? Is there anything that is unusual about the strength of the pipelines?

I'll jump in on this, if you don't mind. I do think it's just good normal activity. I don't think there's anything unique about it. Businesses in the Midwest, like I referenced before, still have good outlooks themselves. They've taken a deep breath on what this tariff means, so to speak, and they're navigating that. We've got a really focused segment a group of bankers that have great reputations in the market. Now we haven't even got into that disruption that Mark talked about potentially in Michigan. I think that will add to the potential there. So what I'm saying is it is just core bread and butter, if you will, C&I activity that we really like.

And then in the investment real estate side, which I I think we stay to our knitting there, but lower interest rates, capital stacks, understanding of cap rates, those have become better understood. So developers are able to push projects to a faster pace and the way we underwrite fits that really well, too. So I do feel good about the fourth quarter. And there's nothing typically at the end of fourth quarter, there's like something with taxes or year-end closing, and there's not any crazy activity like that. This is just I feel like normal run rate, see what happens with rate cuts and how businesses want to start out 2026.

I might add to an contributing to what I agree with everything Stewart just said, with the asset-based lending team coming online actually gives even more optionality and momentum to the C&I team.

John, I'm glad you brought that up. That's so true. Absolutely.

Terrific color, guys. And I apologize if I missed it, but did you give the impact that paydowns had on the CRE book. You did have significant growth in the nonowner-occupied bucket in the quarter and kind of across the industry, we saw a pretty sizable pay downs.

Do you mean do you say CRE book? Or.

Yes.

Yes. I want to make. I mean our nonowner occupied for the quarter was, as I mentioned earlier, was up $87 million so what we're booking primarily, we've got a concentration, as you can see in the real estate slide is in multifamily.

And then obviously, we've got -- we continue to look at opportunities there. And what we're seeing this year is largely driven by the commitments, particularly in the construction side by what we booked last year.

Your line is now open.

Can you guys hear me now?

John, we lost you when you were talking a little bit about last year's production in IRE multifamily. And and how the construction draws are funding out through this summer or so and then we lost.

Okay. Thanks for getting in there, too. And so what we're seeing, obviously, last year yield itself into this year, produces what we're seeing this year. But there's no question that higher rates, I was just ending with what higher rates, obviously, have reduced the rate at which that portfolio has grown.

So I still feel good about it, but it's not 2 years ago, 3 years ago.

Yes. No, I appreciate that color. I recognize that it grew significantly. I guess I was more curious kind of how that was able to happen despite paydown. So that's terrific. And then I guess last one, just maybe for John, on the credit side. Classified loans came down in the quarter, which was nice to see. Just curious pace of that. Those balances going forward, if you have any color?

Yes. When I look at classified loans in the quarter, we've been able to address in the -- really, it was in the commercial real estate side, when rates jumped, we had interest reserves that needed to be addressed, and we've done that really over the last 1.5 years, which we're on the grading, and so that will drive -- potentially drive those higher and we've addressed a lot of those issues.

We've resolved some nonperformers, which has helped well. But as I look forward, and we're kind of -- I feel like we're in a place right now we're kind of just trading dollars in the classified buckets to maybe seeing some improvement and there are a couple of segments that are maybe a little bit more challenged than others, but we're kind of just, I'd say, trading dollars at this point.

Okay. Awesome. Well, thanks very much for the color. Appreciate you taking my question.

Our next question comes from Brian Martin with Janney.

Just maybe, Michelle, just maybe 1 for you or 2 on the margin. Just can you remind us the fixed rate loan repricing that you kind of got coming up here. And then also, I think just on the securities portfolio, I think someone asked about optimization and/or just runoff in that portfolio to fund loan growth.

I guess how how you're thinking about that kind of the legacy, the First Merchants bond book? Is there more room to use cash flows to redeploy the loans? Or is some optimization possible?

Okay. Well, I'll start with your first question on fixed rate loans. And so in the fourth quarter, we have about $130 million of fixed rate loans that will mature and those are sitting at about a yield at about 5%. If we look into 2026, we've got about $350 million that have a yield of about 450 that will mature in 2026. And so hopefully, that answers your first question.

On the securities portfolio, we -- our plan is to continue to use that roll off the cash flow to fund loans on a go-forward basis. And as Mark said, particularly when we close with First savings, we'll continue to evaluate options to optimize our earning asset mix, looking at their portfolios, our portfolios, et cetera. In the First Savings deal, we did assume that we would sell their bond portfolio, which had about $240 million but we'll also continue to evaluate our own.

Got you. And the roll off of the securities portfolio, if you don't do anything with the legacy book, Michelle, what does that look like in the next 12 months?

We have about $280 million of cash flow that will be generated from the bond portfolio over the next 12 months. Now that includes interest. And so you know about $100 million of that will have -- will be interest. And so then the rest is paydowns and maturities, and that will be rolling off at a 218% yield.

Okay. Perfect. And then just on the sensitivity how does First savings impact the -- your asset sensitivity, I guess, as you kind of look at -- once we get the combined company.

It actually reduces our asset sensitivity a bit, so we actually land in early night place. We're still going to be a little asset sensitive, but less so than we were on a stand-alone basis.

Got you. Okay. And then you talked about at your last you or somebody else just on the competition on the deposit side, are you seeing similar competition on the loan side in terms of where new yields are coming on, given, I guess, some of the repricing we've got to look at in terms of the fixed rate, but what is competition on the loan side look like today?

Go ahead.

If I go back to Danny's comment just about loan growth, what we're having fun with now because we're growing at a pretty strong clip. Is just looking at the yield of everything we put on the balance sheet and trying to make sure that we're prioritizing the highest-yielding products given the credit constraints as well.

But -- it's been fun for us to have this kind of growth success to feel like we're winning despite competition in the marketplace and then just being smart about which loans we're putting on the books and at what yield, which is -- it's a good place to be. I'd rather be here than the alternative.

Yes. Okay. And then last one, Mark, I guess you just the opportunity. It sounds like the loan growth, I think -- maybe one of the other people mentioned just a strong loan growth you've had, particularly on the C&I side. But is some of that -- I know you've talked recently about maybe a couple of quarters ago about some pretty good hires you had brought on board and kind of they're contributing. And just it sounds like that's something you're thinking about with the -- if you're not looking at M&A next year that you see opportunities to kind of lift out some more talent to kind of sustain the good momentum you've got here?

Yes. That is the reason that you saw a little uptick in our noninterest expense, and it was in the salary that the talent that we've added to the team. The -- and I would think next year, there's going to be an opportunity, especially in the Detroit marketplace to take advantage of some additional recruiting that just strengthens our franchise.

Got you. Okay. Well, I appreciate it.

Our next question comes from Terry McAvoy with Stephens.

Maybe just start with a question for you, Michelle. Were deposit costs at the end of the quarter below that 2.44% average. And what are your thoughts on where that could go in the fourth quarter? I know you talked about a decline, but just to frame some expectations, where do you see that trending in Q4?

Yes. Good question. We did see them come down a few basis points at the end of the quarter, and that was just because we were anticipating that September rate cut and made some adjustments really quickly that we were able to get pushed in even before the end of the quarter. And so with anticipated rate cuts in October and December, we're going to keep pushing those rates down.

And then just a small question, when I look at the first savings presentation, and I think Mike Stewart was with that group today, the SBA lending those that are on the balance sheet, are those guaranteed or unguaranteed loans and then what are your thoughts on managing that business going forward in terms of retaining some of the unguaranteed portion, which has a higher risk profile than the rest of your commercial portfolio, I would assume.

Yes, I do the bulk of the. Go ahead, Mark. Sorry, I can't see you.

Yes. We're in different locations. The unguaranteed portion is what is on the balance sheet. And the spread is about 2.75% over prime. And so it's a pretty high yielding portfolio. And we're really excited about just putting that entire team on top of our current footprint.

And Mike, maybe you want to talk about the volume, we think we can add just within the First Merchants franchise. And I know that's where you are today.

Yes. One last comment on the -- that the team, as I'm learning self-contained within their SBA Group. They're dedicated, I'll call workout team, and they've had a really good track record of low losses in that portfolio. They understand the process. They have a really nice documentation and relationship to the SBA flow.

So they manage that portfolio, I think, in a very positive manner. And then to Mark's point, what's on the balance sheet is their unguaranteed piece. Getting my arms around and working with the team is they've built a model and build an infrastructure that they feel really comfortable that generates about $150-ish million of SBA volume a year. You heard, Mark, they probably did around 110 or so last year, their fiscal year is in September, their earnings releases next week, so you can pick up some of that information and then juxtapose that to what Mark said earlier.

First Merchants originated $8 million of SBA volume 7 primarily in caps, and that's what they do really well. So when you think about Indiana, Michigan and our Ohio footprint and having an outlet, if you want to call it that, or an opportunity for our business banking teams or community banking teams to have a place to send SBA volume I think it becomes really easy for us to fill in their capacity in a meaningful way and just use it as another wonderful fee opportunity. And be more relevant in our local communities. So that's how I feel like the strategic fit is in place.

Great. And you may -- Terry, you may already know all this, but the SBA program loans can't exceed $5 million, which means an guaranteed portion can't exceed $1.25 billion or $1.250 billion and then if you originate $150 million, and we kept all of the unguaranteed, it'd be $37.5 million for the year and obviously, you have runoff as well. So it's -- it's a portfolio that has some higher risk. That's why the ACLs are higher, and especially what we purchased, will come on at more like 4% or 5%. And -- and -- but the yields are really nice, like I said, with a spread of about 2.75% over prime or yield of 2.75% over prime.

That's perfect.

Our next question comes from Brendan Nosal with Hovde Group.

You're doing well -- good morning. Maybe just starting off here on capital. TCE ratio back above 9% for the first time since late 2021. I know that you'll deploy some here with First savings soon, but ratios remain healthy pro forma even for the deal, and you'll be building pretty healthily off that base.

Can you just walk us how you think about capital generation and uses of excess capital, particularly considering the near-term lack of interest in additional M&A?

Yes. I mean we'll continue to use 1/3 or more for our asset generation been requiring a little bit more than that recently. -- for dividends. And the remaining amount, we're just going to continue to look at ways to either take advantage of our current multiples. Pretty interesting if you just look at buybacks, and this is -- if I think about next year, I think we're trading at $116 million of our adjusted book value, if you make the adjustment for AOCI back in or $127 million of stated book value.

And if we make $4 a share, just where we are effectively today, we're trading at 9x earnings at 9.25%. And so I feel like it's smart to be active in the share buyback space. And then we're also just looking at ways we could optimize our balance sheet. Like I think Nate was asking us about earlier. And whether or not it's smart use of the capital to optimize some of those loan categories that are underpriced where we don't have a deposit relationship or maybe a little bit of our bond restructuring. But what I've looked at a couple of actually, last night, I was going through the releases of Horizon Bank and Simmons Bank and their major bond restructuring. And I would just tell you that's not happening here.

We're not interested in anything that would require a tangible common equity range. If we were to do something smaller that might require a piece of sub debt, and that is interesting to us. But we're performing at a level despite some of those under-yielding assets that we're really proud of, and we think we have the ability to just make incremental improvements.

Okay. Great. Thank you for the definitive answer on a wholesale restructuring there. Maybe turning to asset quality and the reserve. I'm just kind of curious why you're still carrying such a large reserve at 140 of loans. Before you even factor in remaining fair value markets like credit has been really healthy this year, and you're something like, I don't know, 20 or 30 basis points above your peer group when it comes to ACL coverage?

Yes. I mean, it has come down over the last couple of years. And some of it is just the methodology that you select when you build your model and our is the quantitative model produces a higher, more conservative number. The good news is we had really positive credit migration this quarter. When you think about and so we always consider loan growth first and how much provision we want to take and we had really strong loan growth this quarter, but really positive credit migration.

And then even looking at the macroeconomic scenarios, some of the changes in a couple of the macroeconomic variables moved in our direction such that we were -- actually lowered the amount of provision that we required. And so despite the high loan growth that kind of landed us at the $4.3 million provision.

And I would just add, that's the perfect GAAP answer, and it's the right answer. I would say if we try to be more aggressive and put more in earnings, I don't have confidence that we would get paid for it.

Yes. Yes. No, that's totally fair. -- better to add more than not enough. -- final one for me. Just thinking about like the progression of NII dollars from here even if we get the the rate cuts that are forecasted, which I think is to this quarter and then maybe 2 more in 2026. Do you think you can continue to grow dollars of NII even as the Fed is cutting rates as expected?

Yes, we do. And I say that because we've got confidence in our ability to manage deposit costs down, as I talked about earlier. And then even just if you look specifically at this quarter, our end of period loans is really quite a bit higher than our average. -- for the quarter, average loans for the quarter. And so I think that will produce some good interest income coming into Q4 as well.

Next question comes from Nathan Race with Piper Sandler.

Yes. Just want to clarify on the buyback appetite. It sounds like there's still interest there just given the valuation disconnect that you discussed, Mark. And then I just want to confirm that with FSG pending, you guys are precluded from additional fee repurchases?

Yes, that's -- thanks for the clarification. I wouldn't anticipate anything between now and closing. When you think about capital deployment, if we stay at these higher levels and our price continues to be where it is, we would be active.

Okay. But you're not necessarily precluded with the deal announcement pending?

We're not intending to do anything between now and close.

Okay. Understood. Thank you for the clarification, Mark.

Thank you. I would now like to turn the call back over to Mark Hardwick for any closing remarks.

Well, thanks, everyone, for the great questions. It was an exciting quarter for us. We're really proud of the performance, the core organic performance of the company. We're excited about our M&A announced M&A opportunity that we have. And as I mentioned, we're really kind of thrilled with the markets that we're in and the future that it can provide for our company. So just thank you for your investment, and it's a fun call. Thanks, have a great quarter.

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

Thank you for standing by, and welcome to the First Merchants Corporation Second Quarter 2025 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. 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.

Good morning, and welcome to First Merchants' Second Quarter 2025 Conference Call. Thanks for the introduction and for covering the forward-looking statement on Page 2. 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 3 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, Michele Kawiecki.

On Slide 4, 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. On Slide 5, 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 $56.4 million, an increase of $17 million or 43% from a year ago as credit quality returned to our normal healthy levels. This improvement supported a significantly lower provision for credit losses of $5.6 million compared to $24.5 million in the second quarter of 2024. Year-to-date net income totaled $111.2 million, an increase of $24.3 million or 28% from the first half of 2024, while earnings per share totaling $1.92 or $1.92 increased $0.44 or 30% during the same period. We also repurchased an additional $22.1 million worth of shares this quarter. And year-to-date, we've repurchased $31.7 million 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.

Thank you, Mark, and good morning to all. Our business strategy summarized on Slide 6 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 7. And as Mark stated earlier, this was a great quarter of loan growth across all those segments and across all the markets. 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 million of commercial loan growth for the quarter, that's over 10% annualized. $430 million of loan growth year-to-date, that's 9% annualized. CapEx financing, increased usage of revolvers, M&A financings and new business conversion are the primary drivers of all this growth. 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 million of loan growth for the quarter. Pipelines for these segments also ended consistent levels to the end of March. So, we can turn to Slide 8 and review some deposit activity. The commercial segment was the driver of our deposit growth during the quarter, $347 million in total. 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. 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 million 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 a focus on primary core accounts and the focus of deposit costs in general. 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 Michele, and she can review in much more detail the composition of our balance sheet and the drivers on our income statement. Michele?

Thanks, Mike, and good morning, everyone. Slide 9 covers our second quarter performance. Total revenues in Q2 were strong with meaningful growth in both net interest income of $2.7 million and noninterest income of $1.3 million. We continue to demonstrate exceptional discipline in expense management, which added to the performance this quarter with an overall result of pretax pre-provision earnings of $70.7 million. Slide 10 shows our year-to-date results. Lines 1 through 3 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 million during the last 12 months and growing higher-yielding loans by $654 million.

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. Pretax pre-provision earnings totaled $138.1 million, reflecting growth of 7.3%. Those earnings fueled a $2.80 increase in tangible book value to $27.90, which is an increase of 11.2% when compared to the same quarter last year. Slide 11 showed details our investment portfolio. Expected cash flows from scheduled principal and interest payments and bond maturities through the remainder of 2025 totaled $141 million and $282 million for the next 12 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. 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 refi’s this quarter at an average yield of 7.04%, which was up 8 basis points from last quarter. The allowance for credit losses is shown on Slide 13. This quarter, we had net charge-offs of $2.3 million and recorded a $5.6 million provision.

The reserve at quarter end was $195.3 million and the coverage ratio was 1.47%, consistent with last quarter. In addition to the ACL, we have $15.4 million 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 nonperforming loans, changes in the macroeconomic forecast and robust loan growth. Slide 14 shows details of our deposit portfolio. The total cost of deposits increased 7 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 $139.2 million increased $2.8 million from prior quarter. Net interest margin on Line 6 totaled 3.25%, an increase of 3 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 noninterest income. Noninterest income totaled $31.3 million with customer-related fees of $29.4 million. 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 $1.6 million higher than the second quarter of last year, reflecting great momentum from our fee-based businesses. Moving to Slide 17. Noninterest expense for the quarter totaled $93.6 million, 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. Over the last 12 months, the tangible common equity ratio has grown 65 basis points to 8.92%, while returning capital to shareholders through $36.2 million in share repurchases and dividends paid of $82.3 million. We remain well capitalized with the common equity Tier 1 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.

Thanks, Michele, 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 million increase quarter-over-quarter or 9.2% annualized and $654 million year-over-year or 5.2%. C&I lending grew by $147 million this quarter, continuing its strong momentum. Commercial real estate added $36 million, reflecting steady demand and disciplined execution. Our Midwest footprint remains core with 82.7% of borrowers located in our 4-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 million in outstandings across 95 companies in diverse industries. Credit metrics remain solid. Nearly [ 80% ] of borrowers have senior leverage under 3x and 70% maintain fixed charge coverage ratios above 1.5x. Losses remain minimal with just $15.3 million over a 10-year history on $1.9 billion in funded loans through Q2. We also continue to manage our shared national credit exposure prudently with $1.1 billion across 88 borrowers, primarily in wholesale trade, agriculture and manufacturing.

On the consumer side, underwriting and credit quality remains solid. Over 95% of our $710 million in consumer loans had credit scores above 669 at origination. Similarly, 91% of our $1.9 billion residential mortgage portfolio met that same threshold. Turning to Slide 21. Our investment real estate portfolio now stands at roughly $3 billion. Within the non-owner-occupied office, we continue to monitor our exposures closely. The top 10 loans represent 53% of total office exposure with a weighted average loan-to-value of 63.6% at origination. The largest office loan is $25 million secured by a single-tenant mixed-use property at 67.2% loan-to-value with the second largest being $24.4 million in a medical office facility.

Turning to Slide 22. Asset quality remains stable. Our net charge-offs were just 0.07% of average loans annualized. The largest nonaccruals this quarter include a $12.9 million multifamily construction loan, a $6.8 million brewery and a $6 million nursing home. These are isolated cases, and we are actively working through resolution strategies. Then finally, turning to Slide 23 on nonperforming assets. We saw a $22 million payoff of our previously nonaccrual construction loan.

The largest new nonaccrual was the $12.9 million multifamily construction loan mentioned earlier. ORE declined by $4.8 million, reflecting continued progress in nonperforming asset resolution. 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 Hardwick.

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 10 years and highlights how acquisitions have improved our footprint and fuel growth.

We believe in accretive M&A, but it's important to note that we focus on organic growth first. We are very selective when it comes to mergers and acquisitions, and April 1 marked the 3-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 Instructions] Our first question comes from Daniel Tamayo with Raymond James.

I guess maybe we can start on the margin, if you don't mind. Maybe for you, Michele, 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? And then any color or guidance you might have on margin overall?

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. And I do think that, that will put some modest compression in margin in the back half of the year compared to this quarter.

Okay. All right. 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 I just want to kind of make sure that, that's not pull-through from earlier in the year where some of the borrowers were on hold.

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 -- 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.

Yes. And I think, Daniel, the only other place that I -- when I think about pull-through might have been 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 expected tariffs, but that has added a little bit to outstandings in the quarter.

[Operator Instructions] Our next question comes from Terry McEvoy with Stephens.

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

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. 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 that being said, we do expect to see growth in fees through the remainder of the year. And Mike, do you want to…

To your point, there's 4 primary categories that are private -- the fee categories that our private wealth team works through. And when I think about the investment management, wealth management, which, to your point, is tied to that, it saw the growth. But when you think about some of the other categories, retirement plan services, as an example, our private banking, those fees were relatively flat to your point. So, it just muted some of those [ corollary ] into the market. But like Michele said, view that as still a primary driver of our fee income growth in that category going forward.

And then maybe just taking a step back, Mark, I think last year, you completed 5 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? And just kind of remind us longer term, what are the benefits of those tech initiatives?

Yes. 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 360 view and having dashboards in the hands of our bankers, et cetera. And the investment was around making sure we could open accounts faster in the branch network, allowing our teams to be more active calling than just spending 45 minutes trying to open account. That's down to 5 or 10 minutes.

Our treasury management platform was a significant upgrade. And, so, our calling efforts on the commercial side in the treasury space have been increased. We have a better product to sell. 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 -- to highlight the products, and we're also doing modest improvements. So, we kind of -- we converted all those where it was kind of whatever we had before is kind of how it transitioned over. 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. So, I 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. So that was part of how we built the plan and why we still remain bullish across all the segments.

Appreciate that, Mark. 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.

[Operator Instructions] Our next question comes from Brendan Nosal with Hovde Group.

Maybe just starting off here on capital. You folks have been really active on the capital front over the past 2 years between almost $100 million of sub debt redemptions and very active use of the buyback. Just to the extent that you continue to generate excess capital even after supporting loan growth, what are your latest thoughts on deployment?

Yes. We still kind of have the same mindset. We use 1/3 of our earnings to support balance sheet growth, about 1/3 for dividends and the other 1/3 are for kind of other capital activities, and it might be redemption of sub debt, repurchase of shares, cash and acquisitions, et cetera. And so yes, you're right, we've redeemed all the sub debt that we really have available to us at this point. 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 to 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. And as our stock price works its way further north, I think we'll be less aggressive with buybacks.

Okay. All right. Maybe just turning to the funding base and just looking specifically at brokered funding. I think the total is up to $1.2 billion now or like 8% of the base. Just kind of curious how high you're comfortable taking use of that funding source? And is there any point at which that starts to become a bit of a constraint on the balance sheet?

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

Okay. Perfect. I'm going to sneak one more in there. Just maybe going back to capital. I know you get the M&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?

Well, there's clearly been movement and even some speculation across the industry around M&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&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, we're -- our 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 trying to figure out if there's a price that makes sense that works for both parties.

[Operator Instructions] Our next question comes from Nathan Race with Piper Sandler.

Michele, going back to your margin commentary, I 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. It 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?

Yes. 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. It really depends on our deposit competition. We've seen deposit competition really heat up. 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, we do have -- still have a bit of an asset-sensitive balance sheet. And, so, I think with each rate cut on an annualized basis, I would expect about 2 basis points of compression for each 25 basis point rate cut. And, so, if we get a couple of 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.

Okay. Got it. I apologize, I jumped on a little late, but 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?

Yes, 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 grow in that respect. If you break that down a little further, core C&I has really been kind of a driver of that most recently. Our real estate production is really good, too. It's just -- that's what's getting offset with the normal course payoffs. So, the portfolio isn't necessarily growing on investment real estate like the C&I is, but the production level is really good there.

The pipelines inside consumer mortgage and private wealth, that 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.

Yes. 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. 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. And 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 -- I hope would get across to investors.

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 fee income growth outlook going forward. But just curious within that, how we should think about that other line? I know there was 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?

I mean if you're referring to the nonclient-related fees, is that what you're looking at, Nate?

Yes. Just when I look at the income statement, it was pretty much 0 for other fee income this quarter. So just any thoughts on that revenue line in particular?

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

[Operator Instructions] Our next question comes from Damon DelMonte with KBW.

First question on the outlook for expenses. Good job of keeping them in check here in the second quarter compared to the first quarter. Michele, 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?

Yes. 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.

Yes. We've really -- some of our optimism in the loan growth of the loan book going forward has a lot to do with just the addition of bankers. I mean we -- Mike, you didn't mention it, but we've brought in, what, 4 people out of JPMorgan's asset-based lending group. And they've all started -- well, 3 of the 4 have 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. I 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.

And most of those expenses are embedded, but we've got some that will increase. So as Michele talks about the expense run rate, those are the only areas where I feel like it puts some pressure on us. And the return of some of that is in the future as loan growth occurs after these folks work through non-competes, et cetera. 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.

I'm glad you brought that up, Mark. Some really smart key people additions across many different which is normal for us, but this year has 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. So it's a wonderful mix across the way of fee income and balance sheet.

Yes. That small business, we moved it into the consumer bank, and it was, what, $875 million of deposits and only $30 million or so of loans. I may have the number right -- that's about right. And we're excited about what we think the future could 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, and we're thrilled with the momentum. And that's kind of the case in all of the different ones that I mentioned. I probably shouldn't have highlighted JPMorgan specifically, but we picked up those 4 bankers. It was a huge win for us, and we're excited about what it can do for the future.

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?

I don't know that this quarter is a little bit higher. 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. It just kind of depends on whether the -- we've got to make adjustments for the macroeconomic outlook. And, so, in Q2, of course, the unemployment rate forecast 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, 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.

[Operator Instructions] Our next question comes from Brian Martin with Janney.

Just a couple. Michele, 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 you said to your point earlier about no changes from the Fed right now, kind of a stable rate environment that the -- given the loan growth, the competitive factors, that should just drift a bit higher in the back half of the year?

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

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

Got you. Okay. And then maybe how about just on the fixed rate loan repricing, Michele, can you remind us what that is, whether, I guess, the back half of the year or next 12 months, what you may have on that front?

Yes. Sorry, I'm just trying to.

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

I'm going to defer some of -- you got kind of half and half, Brian. That was Mike Stewart answering the questions about the hires, et cetera. I think from the optimism through the portfolio, look, 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. So it creates a lot of, I'll say, a lack of clarity as to exactly what's going to happen. And, so, it's hard to tell.

There's no question that the bill itself should be -- should help and provide optimism to our customers, though.

We're operating in the Midwest, and the Midwest right now has really good economic growth, and we're taking advantage of that. Our businesses, clients' 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. 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.

Yes. And this isn't perfect, but we probably had 5 meaningful hires on the sales side in the first half, and we have 5 more in the second half.

Brian, I do have my notes now on the fixed rate loans. And, so, in the back half of 2025, we've got about -- maybe about $200 million of fixed rate loans that are going to reprice that are currently sitting at about 5%.

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

Yes, yes.

Okay. Got you. And then just the last one for me was just on the tax rate, just housekeeping, if the kind of current level is a good level to think about?

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.

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

Yes, 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 90 days.

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