FRME

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'll now 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 two. We released our earnings yesterday after markets closed, and today's presentation materials are available via the link on page three of the earnings release. Turning to slide three, 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 Michele Kawiecki, our Chief Financial Officer. Slide four 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 five, First quarter reported net income was $27.7 million, or $0.45 per diluted share. Reported results included two notable non-core items. First, the legal close of First Savings acquisition on February 1st resulted in $17 million of one-time 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%+ yield. This repositioning resulted in a $29.8 million mark-to-market charge in the quarter, with a tangible book value earned back of approximately four 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 remains 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 four 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 regional 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, continue 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 base teams was at record level 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 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. Michele 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, continued to deliver quality growth within our markets. Our people are a 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 Michele, 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 a bulk of the originations are sold.

I do want to highlight their 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 Michele to review in more detail the composition of our balance sheet and the drivers on the income statement. Michele?

Thanks, Mike, and good morning, everyone. Slide 9 covers our first quarter performance, including two months of operating results from First Savings following the February 1st closing of the acquisition. There was meaningful growth in total revenues in Q1. Net interest income grew $12.2 million and non-interest income grew $2.5 million linked quarter. This resulted in a $6.3 million increase in overall pre-tax, 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 valuation 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 recorded 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 non-interest-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 six basis points from prior quarter, despite the lower day count in the quarter, which reduced margin by five 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, non-interest expense for the quarter totaled to $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 one-time charge of $900,000 for the write-down of a 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 one 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, Michele, 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 balance 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 two office-related exposures totaling roughly $12 million.

These credits are well-known, 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 non-performing 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.

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 of 2026, which Michele 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. I hope it's clear that organic growth is our top priority for the year. We're going to get through the integration on mid-May, May 15. 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.

Thank you. At this time, we'll conduct a question and answer session. As a reminder to ask the question, you need to press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Daniel Tamayo of Raymond James. Your line is now open.

Thank you. Good morning, everyone. Maybe first just starting on the loan growth side. Seasonally down in the first quarter, you had 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 and thoughts on pay downs, the timing of the slowing going forward, and if you're still comfortable with, I think we talked about 6%-8% growth for the year last quarter. If that number still holds. Thanks.

Yeah. Good morning, Dan. Well, let's start with the end. Yes, I do feel confident with that mid-single digit growth rate and reaffirm that. What kind of demonstrates that in my confidence level is if you really take a look at our commercial pipelines. They're as strong as they have been historically. What I've 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 production. The payoffs were 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. 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.

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. 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. If you look at how we think about normal course of loan amortizations and what we think about normal course of payoffs, it was just a little bit higher, but nothing unexpected out of the blue of people leaving for undue reasons. The production level that we had, which is on pace for about $2 billion if we got it in the first quarter, just that we were stacked with some payoffs and feel really good about where pipelines are.

Where those two business units are already driving record provisions and bringing it into manifesting our balance sheet, and then where I've seen our current April footing through Q2.

Mike, I'd love to just add. You made this in your actual comments earlier, but the pay downs really came exactly the way we would hope they would come. Maybe not the timing.

Yeah.

It was investment real estate moving into the secondary market, which is what we always expect and anticipate, which is great for credit quality. Then the sponsor book exactly as you would anticipate that over time those sponsors liquidate those companies, sell them to maybe another sponsor, et cetera. It's anticipated. It was just a little more first-quarter heavy than what we had expected.

Yeah, that's exactly what I'm trying to say.

Yeah.

Some of it we thought might have happened in the fourth quarter. It bled over to this, and some of what we might have had teed up in the second quarter. It happened early because the secondary markets are good with real estate.

Yes.

Great. Very helpful. Thanks, guys. Maybe for Michele, 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. Just curious how that impacts the margin, just overall thoughts for the rest of the year.

Yeah. Well, I'll address the loan sale first. As Mark said in his comments, the loans that we're selling have a weighted average coupon of 3.46%. Immediately once we get that liquidity, we'll pay down some of our higher cost deposits. I would say those are probably averaging about maybe 3.80%. Over time, we will invest that liquidity in loans. Of course, that will happen over the course of the next 18-24 months. We'll get some margin pickup over time. It won't be immediate. It'll 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 five basis points. Once we get into Q2, Q3, Q4, we will see margin tick 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 rates that we pay on deposits will be relatively steady. I would expect there to be a few basis points of pickup on margin through the year.

Okay, that's inclusive of the 5 basis points reversal, I guess, from the first quarter. Just to call it a handful of basis points up from the first quarter level of margin.

Yes, that's correct.

Okay. All right, great. Okay, well, I appreciate that color. I will step back. Thank you.

Thanks, Danny.

Thank you. One moment for our next question. Our next question comes from the line of Russell Gunther of Stephens. Your line is now open.

Hey, good morning, guys.

Good morning, Russell.

Morning. I wanted to see if you could touch a bit more on the deposit migration into non-interest bearing this quarter. Perhaps how you're thinking about the sustainability of the remix, whether you assume any runoff from the consumer product redesign. Then as a follow-up, Michele, 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?

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

Got it. Okay. Thank you.

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

Yeah. We're in year two of very strategically remixing the deposit base.

That's right.

to be as core as possible with less dependence on CDs and public funds. It just takes time, but we're really pleased with the progress we're making.

I appreciate all the color and it's 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? Then from an overall kind of capital return perspective, would you guys expect to remain active with the buyback here?

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

Okay, great. Very helpful. Thank you guys for taking my question.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Brandon Nosal of Hovde Group. Your line is now open.

Hey. Good morning, everybody. Hope you're doing well.

Morning.

Morning. 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. I'm just curious if you see any other need for additional balance sheet optimization over the course of the year.

No. 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. It allows us to stay really diligent with deposit pricing and just remix the loan book, at this point, 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. At least in the coming months, I'm not anticipating anything further. We do evaluate all the time just what our options are. Really, we're pleased with the earn back.

Especially the modeling of this, the way Michele talked about it, is we just assumed our mid- to high-single-digit loan growth would continue in a normal course, is the way we budgeted for a couple of years. Then said if we redeploy this money out of mortgages into commercial, over a 24-month window, what kind of pickup do we have? That's how the four-year earn back was calculated. I'm pretty confident that we'll be able to accelerate some of that. This year we'll be using that liquidity for current loan growth. You can model it a lot of different ways. We think the four-year earn back is the most conservative, but I just want to be sure everyone understands how we're thinking about it.

Yep, that's helpful color, Mark. Thank you. 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 their three specialty businesses now that you've had time to see them in action? Heard your commentary on SBA, but I guess, I'm more curious about First-Lien HELOC and the triple net lease product.

Yeah. 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. 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. I'm really pleased with where we stand today and excited about getting through the integration, moving forward, and every day that we own the company, the more excited I am about the verticals.

Yeah. 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. 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. It's an extension of investment real estate. It's an extension of what we understood, but we really didn't focus on. 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 a originate model. It gives us options to put it on the balance sheet if we so choose, or sell. The First-Lien HELOC business is a unique business for us.

They built a really nice model that also has continued to have similar production levels as they were through this period of time. That has been, for them, a complete originate and sell. We've got buyers on that and secondary servicers. It's a fee generation business that there is some of that on our balance sheet today. It was on their balance sheet. We've 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. 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 had built.

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 with First Merchants. First Merchants SBA production last year was less than $10 million. 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 us. It's just a natural extension of actually probably bringing them more volume and not letting them be the fulfillment team and whatnot. That's how I'm viewing those three verticals, and we're watching it through integration day. Then my team hears regularly what I call day two.

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 models.

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. We do see opportunity to mostly just in the size of credits, to start to make some adjustments, especially you think about the triple net lease business. It is a lever that we could use. So far, we've said, "Well, hey, let's just maintain the growth profile and the size of each credit exactly the way it is." I would just say it leans on the small side. Excited about how it can continue to help facilitate our growth in the future.

All right. Thank you for taking my questions. Appreciate it.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Damon DelMonte of KBW. Your line is now open.

Hey, good morning, everyone. Hope you're all doing well today. First question, regarding the margin. Michele, hoping you could give a little color on the expectation for the fair value accretion marks that we could expect going forward.

Yeah. For the first two months of us having the First Savings acquisition, I think we've recorded probably maybe $1.5 million of fair value accretion. That's on a two-month basis. I would consider the run rate on a go-forward basis to probably be fairly similar.

Okay. Great. Okay. 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 FSFG?

Sure. I think I'd reiterate the guidance that I gave last quarter on legacy First Merchants. On the legacy First Merchants space, I had given guidance that we expected a 3%-5% increase year-over-year. 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. When you put all those pieces together, the quarterly expense total, like on a quarterly run rate, will probably be somewhere between $111 million-$114 million.

You think that level is kind of like once the savings hit, so that's kind of like almost like an exit rate of 20 in the fourth quarter?

Yeah. Yes.

Okay. Got it. Okay, great. 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've 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 optimistically and very active right now, strategically in overlap markets where being able to add quality talent in our markets would just augment our branding and growth. We're very active in that space, especially. I would just say in the Michigan market in particular. That being also said, I referenced that we've had to continue strategic hires along the way. That's part of our business model of 2026. Six new bankers through asset-based lending, through investment real estate, through a 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. That's not including what we've recently done in our private wealth group, which I think as you saw that had really nice fee growth as we continue to win investors.

Great. Appreciate that, Mike. That's all that I had. Thanks a lot, everyone.

Yeah.

Thank you. One moment for our next question. Our next question comes from the line of Nathan Race of Piper Sandler. Your line is now open.

Hi, everyone. Good morning. Thanks for taking the questions. Michele, I was wondering if you could kind of just frame up the income expectations for the second quarter and just generally you're 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 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.

Yeah. When you look at our Q1 normalized level of total non-interest income, it was $35.6 million. When I think about where that goes in the coming quarters, I would expect to get a full quarter, a full three 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%-4% in the coming quarters. I think that's how you can think about what kind of lift you'll see Q2, Q3, Q4.

Okay. 3%-4% lift in the second quarter, and then.

Mm-hmm

similar trajectory in the back half of the year?

Yeah.

Okay. Got you. 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? Just generally, 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.

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

We had a couple of names that we had been working for some time that just finally came to a head and we moved down.

Got it. 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 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.

Yeah. Typically, 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. Right now, I think we're in a really good place when we look at the different economic scenarios that we run and kind of within that range.

Okay. Got it. I appreciate all the color. Thank you, everyone.

Thanks, Nathan Race.

Thank you. One moment for our next question. Our next question comes to the line of Brian Martin of Brean Capital. Your line is now open.

Hey, good morning, everyone. I'll say, just one thought, Michele, you talked about the roll-off rate on the securities. Just on the loans, can you just remind us now with FSFG, what's repricing over the balance of the year and what type of pickup you get on what's coming due?

Yeah. Well, I know one of the things that generally you're interested in, Brian, is on the fixed-rate loans. Like our fixed-rate loan maturities, we've got about $100 million that matures at a rate of about 4.5% each quarter. There's definitely a tailwind there. As you know, two-thirds of our portfolio reprices pretty much immediately with any rate changes. 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. I think, Mike, I was going to ask you about the people you hired, but it sounds like you've maybe hired 5-6 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 it was 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 determination, and we were in tune with that. Yeah.

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%-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. That is built into the guidance that I provided.

Yeah, 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. 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. When Mike talks about the new 10 or so that we're hiring, we're not anticipating immediate performance.

Yeah. All those were hired in the first quarter, or were some of those hired last year?

No, 15 were throughout the year last year, a little more back end. We have 10 planned this year that-

I referenced 6 in commercial and 2 in private wealth, but.

Those were last year.

A couple of them also. No, that was in this quarter. Yeah, so we're off and running like we wanted to. That production

You know, should start to see itself on the back half of this year.

Yeah.

Yeah.

Got you. Okay. I think, Michele, just kind of on the margin for a minute, given the day count and the change there, and I know there was $1 million of benefit. I mean, is the 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 3-4 or whatever, something off of the current level. That's how to think about kind of going into 2Q.

Yeah. No, I think that's right. We will see. I do expect to see that kind of pick up. 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. I did want to make sure that I made that point to kind of reiterate consensus.

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

Yeah, on the SBA, not yet. Our chair, Jean Wojtowicz, is in the SBA business and has her own company. That's what they do. 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. We feel like we have a good handle on it, and we're excited about the future.

Okay.

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

13%. Okay. I think you said, Michele, the accretion, is it around $3 million? 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-$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.

Two, just from their piece of it, plus the legacy.

Yeah.

Yeah. Got you.

Correct.

Okay.

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

Yeah. Okay. Perfect. Thank you for taking the questions, and congrats on the quarter and the transaction.

Thanks, Brian.

Thank you, Brian.

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

Yeah, thank you. My closing comments really are just to try to stay as high level as possible, is we remain incredibly optimistic about the remainder of the year. 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. 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, we 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 2023, 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 were all in the double digit range. Our expense control has been something we've been great at for years. We've got adequate capital. It's allowing us to be active in 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. I think it just sets us up for a really strong 2026 and kind of feeds into 2027. I appreciate your investment in the company and I'm happy to continue to have one-on-one discussions with any interested investors or current investors for that matter. Thanks for your time. We appreciate it, and we'll talk to you next quarter.

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 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 Merchants 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 closed, you can access today's slides by following the link on the third page of our earnings release. Joining me today are President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki. On Slide 4, you'll see our 111 banking centers across Indiana, Ohio and Michigan, along with several recent awards recognizing our culture and performance. We ended the year with record total assets of $19 billion, record total loans of $13.8 billion and record total deposits of $15.3 billion. On Slides 5 and 6, our strong balance sheet and earnings performance reflect the quality of the First Merchants team, our customer base and our community-oriented business model. For the full year, we delivered record net income of $224.1 million and record diluted earnings per share of $3.88, an increase of 13.8% from the previous year. Fourth quarter net income totaled $56.6 million or $0.99 per share. Annual return on assets was 1.21% and annual return on tangible common equity was 14.08%. Loan growth remained robust with $197 million of linked quarter growth or 5.8% annualized and nearly $1 billion or $939 million of growth for the year, representing 7.3%. Our efficiency ratio was 54.5% for the year, and we achieved significant operating leverage with revenues growing almost 5x faster than expenses. We have now received all regulatory and shareholder approval to proceed with the acquisition of First Savings Group, which adds approximately $2.4 billion of assets and expands our presence into Southern Indiana and the Louisville MSA. We remain confident in our strategic and financial benefits of the merger, and we will actually close this weekend on February 1, 2026. Now Mike Stewart will cover some of our line of business metrics.

Thank you, Mark, and good morning to all. The business strategy summarized on Slide 7 has been updated to reflect the collective work of our lines of business leadership teams. Each of these business units refined and updated their strategy in alignment with our primary focus of building on our Midwestern strength, growing organically through deeper relationships and smarter use of technology for enhanced client relationship and internal efficiencies. 2025 was a year of momentum and record results. This slide summarizes how our teams have been winning and capturing market share. We remain a commercially focused organization across all these business segments with an eye on growing within the markets pictured on the next slide. So let's go to Slide 8. As Mark stated earlier, this was another great quarter of loan growth across all segments and across all markets. It is very pleasing to see our Midwest economies continue to expand, our clients' businesses continue to grow and see our bankers continuing to win new relationships. $153 million in commercial loan growth for the quarter or 6% annualized, $852 million of increased commercial loan balances year-to-date, nearly 7% growth rate for all 2025. CapEx financing, increased usage of revolvers, M&A financing and new business conversion are the drivers of this growth. Another encouraging bullet point on this page is the quarter ending pipeline, which is stable from prior quarter and gives me optimism that we will be able to maintain our loan growth into the first quarter. The Consumer segment also shared in balance sheet growth with the residential mortgage, HELOC and private banking relationships driving the $44 million of loan growth for the quarter and the $87 million for all 2025. Pipelines in this segment also consistent from our end of quarter prior. So we can turn to Slide 9 and talk about deposits. The fourth quarter was our strongest quarter of deposit growth with the consumer segment driving increases in new households and balances. Enhanced digital platforms are deepening our client relationships. Our marketing efforts are leveraging the strength of our local brand and the reputation that we have and driving new relationships. The bottom section of this page summarizes the fourth quarter growth of $155 million of total consumer deposit increases with over $250 million in non-maturity balance growth. The full year's results also reflect the growth in the mix of non-maturity and maturity balances assisting in the margin improvement Michele will review next. Commercial business segment is summarized on the top of the page. While deposits have increased in both the quarter and year-to-date, the primary driver has come through our public fund depository relationships. It is a higher cost of deposit, but they are local government and public relationships that utilize many other treasury services we offer. Part of the increase in loan balances come from higher line of credit utilization, which typically reduces operating deposit account balances. Improving the mix of all deposit categories has been the focus of our teams for the past year and has been accomplished by focusing on primary core accounts and deposit cost. Overall, I'm pleased with the active engagement our teams are having with their clients as we've continued our pricing discipline, specifically with maturity deposits and public funds and remain hyper focused on relationships and converting single product users. Before turning the call over to Michele, one last comment regarding First Savings Bank. As Mark said, our integration efforts are on track. The engagement of their team has been strong. We have completed our product and process mapping. So post legal close, we will begin the on-site training and preparation for the May integration. Their community bank model and specialty verticals have a solid reputation and continuing their growth within Southern Indiana in these verticals will be our priority. So I'm going to turn the call over to Michele now, and she can review in more detail the drivers of our balance sheet and income statement. Michele?

Thanks, Mike, and good morning, everyone. Slide 10 covers our fourth quarter performance, which reflects a continuation of positive financial trends we had throughout 2025. Total revenues in Q4 were strong with meaningful growth in both net interest income of $5.4 million and noninterest income of $0.6 million. This resulted in overall pretax pre-provision earnings of $72.4 million, up $1.9 million from prior quarter. Strong earnings drove a 4% increase in tangible book value per share on a linked-quarter basis. Turning to annual results on Slide 11. We delivered record diluted EPS and achieved an all-time high tangible book value per share in 2025. Year-over-year positive trends include double-digit net income growth of 12.2% and positive operating leverage. Tangible book value per share ended the year at $30.18, which is an increase of $3.40 or 12.7% from prior year. Slide 12 shows details of our investment portfolio. On the bottom right, you will see the valuation of the portfolio improved meaningfully during the quarter due to changes in interest rates. The unrealized loss on the available-for-sale portfolio declined $30 million or 15%. Expected cash flows from scheduled principal and interest payments and bond maturities over the next 12 months totaled $282 million with a roll-off yield of approximately 2.09%. We plan to continue to use this cash flow to fund higher-yielding loan growth in the near term. Slide 13 covers our loan portfolio. The total loan portfolio yield declined by 8 basis points from the prior quarter to 6.32% due to the impact of recent Fed rate cuts. This quarter, new and renewed loans were originated with a yield of 6.51%, which remains a tailwind for the overall portfolio yield. The allowance for credit losses is shown on Slide 14. This quarter, we had net charge-offs of $6 million and recorded a $7.2 million provision. The reserve at quarter end was $195.6 million and the coverage ratio of 1.42% remained robust. In addition to the ACL, we have $13.4 million of remaining fair value marks on acquired loans, providing additional coverage for potential losses. Slide 15 shows details of our deposit portfolio. The rate paid on deposits declined meaningfully by 12 basis points to 2.32% this quarter. Our team strategically reduced deposit rates following the Fed's rate cuts, resulting in a $3 million reduction in interest expense even as deposits grew $424.9 million or 11.4% annualized in the fourth quarter. On Slide 16, net interest income on a fully tax equivalent basis of $145.3 million increased $5.4 million linked quarter and was up $5.1 million from the same period in prior year. Net interest income was positively impacted by a $3.3 million recovery from a successful resolution of a nonaccrual loan. Our quarterly net interest margin of 3.29% increased 5 basis points from prior quarter. Our teams continue to stay focused on growing loans and deposits using disciplined pricing and our net interest income growth trend throughout 2025 is evidence of their success. Next, Slide 17 shows the details of noninterest income, which totaled $33.1 million with customer-related fees of $30 million. Customer-related fees were strong in all categories with notable quarter-over-quarter growth in wealth management fees of approximately $300,000, card payment fees of $300,000 and gains on sales of mortgage loans of $400,000. Moving to Slide 18. Noninterest expense for the quarter totaled $99.5 million, an increase of $3 million or 3% linked quarter. Expenses for the quarter included $500,000 of acquisition costs, which were offset by a reduction of the FDIC special assessment accrual of $700,000. Full year noninterest expense increased only $3.2 million or less than 1%, demonstrating significant operating leverage. Slide 19 shows our capital ratios. The tangible common equity ratio benefited from strong earnings and AOCI recapture, increasing 20 basis points to 9.38% while returning capital to shareholders through share repurchases and dividends. During the quarter, we repurchased 272,000 of shares for $10.4 million, bringing total share repurchases in 2025 to just over 1.2 million shares for $46.9 million. We remain well capitalized with a common equity Tier 1 ratio at 11.7% and are well positioned to support continued balance sheet growth. That concludes my remarks, and I will now turn it over to Chief Credit Officer, John Martin, to discuss asset quality.

Thanks, Michele, and good morning. My remarks begin on Slide 20. We had strong loan growth for both the year and the quarter of 7.3% and 5.8%, respectively, led by C&I loans shown on line 4, which grew nearly $700 million for the year. While we experienced strong C&I loan demand, we saw more moderate growth in investment real estate for the year and quarter on Line 7 as higher rates slow demand and assets moved into the permanent financing market. The diversity of lending types our teams continue to originate has allowed us to grow as demand varies across various asset classes. On Slide 21 and Slide 22, we again provided more detail of the loan portfolio. On Slide 21, the C&I classification includes sponsor finance as well as owner-occupied CRE. Current line utilization leveled off during the quarter, declining slightly from 50% to 49.8% after climbing in the first half of 2025. In the sponsor finance portfolio, we track key credit metrics across 90 platform companies. We took a $4.4 million charge in the quarter to an individual borrower. We underwrite to higher origination standards compared to traditional C&I loans and track the portfolio quarterly. The portfolio almost exclusively consists of single bank credits for private equity-backed platform companies as opposed to large, widely syndicated leveraged loans from money center banks trading desks. On Slide 22, we break out the investment or nonowner-occupied commercial real estate portfolio. Our office loans are detailed on the bottom half of the slide, represent only 1.9% of total loans and any potential issues are easily managed. The wheel chart on the bottom right details the office portfolio maturities, loans maturing in less than a year represent 28.1% of the portfolio or roughly $73 million. On Slide 23, I highlight this quarter's asset quality trends and position. Asset quality remains strong. NPAs and 90-day past due loans on line 4 were up $5.6 million or 2.54%. The largest nonaccrual, a $12.9 million investment real estate multifamily construction project paid off without loss of principal shortly after quarter end. Adjusting for this payoff, NPAs and 90-day past due loans would have fallen to 0.45%, down year-over-year from 0.66%. Turning to the asset quality migration roll forward on Slide 24 in column 4Q '25, there were new nonaccruals of $22.8 million on Line 2, the largest of which was a $9.6 million investment real estate multifamily construction project. We had a $9.1 million reduction on Line 3 from payoffs or changes in accrual status primarily related to a nursing facility that had been one of the prior quarter's largest nonaccruals that paid off. During dropping down to Line 5, there were $7.3 million in gross charge-offs, the largest of which was the $4.4 million sponsor finance C&I borrower I mentioned earlier. Then dropping down to Lines 12 and 13, we ended the quarter up $5.6 million, excluding the early quarter payoff with NPAs and 90-day past due loans totaling $74.5 million. To summarize, asset quality remains stable and improving. Classified loan balances are largely unchanged at 2.56% of loans with 18 basis points of annualized net charge-offs. We continue to grow C&I loans with our commercially oriented teams. And finally, we are excited about the local opportunities and new business verticals First Savings Bank brings as we head into 2026. I appreciate your attention, and I'll turn the call back over to Mark Hardwick.

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 with 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 for some reason, we dropped 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 -- and 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 focused on trying to take pressure off of liquidity. So we're 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.

Our next question will come from the line of Daniel Tamayo with Raymond James.

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. You're right. The pipelines, 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 focused on different size companies are 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, that's a really good discipline to have as it rounds out a lot of things we're doing. So when I look at that loan growth, I feel like it's balanced through 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's just got good momentum across the board. I will say that's 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 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.

And 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 team. 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 with balances and yields?

Yes, I do. And 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%. And 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 on some savings on interest expense there. In the third quarter, we've got another -- just 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 want 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 -- that 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 that we're finding 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, than 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 how those numbers exceed any expense additions that we'll have on a net basis when you consider First Merchants, First Savings plus 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.

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 have budgeted to increase about -- 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 we know that closes 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 that 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 when 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.

Oh, no. Yes, I was going to dovetail that into the core margin, so go ahead.

Yes. Just looking at year-over-year, we 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.

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 were talking in mid- to high single-digit range, but just curious if that's still a good expectation versus kind of the 4Q level?

On the 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 opportunities that sit with our acquisition, also originate and sell with the mortgage side, originating to sell with 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 maybe 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 got Fifth Third and Comerica and 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 with our teams that might be a little sensitive to moving from one 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 assuring that they've got their arms around individuals and giving them big hubs as they should. But those type of disruptions and the changes that 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, don't know yet how we can play into 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'd prefer the price to be up when 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 to 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 margin for the quarter, the interest recovery did add several basis points to our core margin of 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 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 gives our margin 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 picture as you get later in the year to Mark's comment or the other comments earlier about operating leverage. Just kind of where the -- 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?

So 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 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 once we get [indiscernible], yes.

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 repricing 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 was 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 disagreement amongst partners and the strategy there that have kind of fallen out. The two names that one that went in, one 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 to move into the permanent market. When I think about charge-offs, I think about it in that 15 to 20 basis point about depending on what we have in any individual quarter. So yes, that $6 million to $7 million 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 public fund side when tax receipts grow and tax payments go out, and you see that in the second and fourth quarters. But when I think about the business flow and the core operating accounts, we penetrate relationships really well. And I do think it's 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 and where the stock is at in the buyback, where does -- how does M&A fit into that? I mean, obviously, it seems like you have your hands full with the transaction and a lot in front of you. But -- and where the valuation is 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.

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.