10-Q: First Merchants Q3 Earnings Rise, Loan Growth Strong

First Merchants Corporation reported increased net income and diluted EPS for Q3 2025, driven by strong loan growth and improved net interest margin, despite a decline in asset yields.

Summary

• Net income available to common stockholders increased to $56.3 million for the three months ended September 30, 2025, up from $48.7 million in the same period of 2024.
• Diluted earnings per common share rose to $0.98 for Q3 2025, compared to $0.84 in Q3 2024.
• For the nine months ended September 30, 2025, net income available to common stockholders was $167.5 million, and diluted EPS was $2.90, up from $135.6 million and $2.31, respectively, in the prior year.
• Total assets reached $18.8 billion as of September 30, 2025, an increase of $499.7 million or 2.7% from December 31, 2024.
• The total loan portfolio grew by $741.3 million, or 7.7% on an annualized basis, since December 31, 2024, reaching $13.6 billion.
• Total deposits increased by $348.4 million, or 3.2% on an annualized basis, to $14.9 billion as of September 30, 2025.
• Net interest income on a fully taxable equivalent (FTE) basis increased by 2.1% to $139.9 million in Q3 2025 and by 2.8% to $415.5 million for the nine months ended September 30, 2025.
• Net interest margin (FTE) improved slightly to 3.24% in Q3 2025 (from 3.23% in Q3 2024) and to 3.23% for 9M 2025 (from 3.16% in 9M 2024).
• Provision for credit losses decreased to $4.3 million in Q3 2025 (from $5.0 million in Q3 2024) and to $14.1 million for 9M 2025 (from $31.5 million in 9M 2024).
• Noninterest income increased by 30.6% to $32.5 million in Q3 2025 and by 13.3% to $93.8 million for 9M 2025.
• Nonaccrual loans decreased by $8.0 million from December 31, 2024, to $65.7 million as of September 30, 2025.
• The Allowance for Credit Losses on Loans (ACL Loans) totaled $194.5 million, representing 1.43% of total loans at September 30, 2025, compared to 1.50% at December 31, 2024.
• The Corporation entered into a Merger Agreement with First Savings Financial Group, Inc. on September 24, 2025, with the merger expected to close in the first quarter of 2026.

Sentiment

Score: 8

Explanation: The company demonstrated strong earnings growth, improved net interest margin, and robust loan expansion. The planned acquisition of First Savings Financial Group, Inc. is a strategic positive. However, the increase in total past due loans and the decline in new loan yields warrant monitoring.

Positives

• Net income available to common stockholders increased to $56.3 million in Q3 2025 from $48.7 million in Q3 2024, and to $167.5 million for 9M 2025 from $135.6 million for 9M 2024.
• Diluted EPS increased to $0.98 in Q3 2025 from $0.84 in Q3 2024, and to $2.90 for 9M 2025 from $2.31 for 9M 2024.
• Total loans grew by $741.3 million, an annualized rate of 7.7%, since December 31, 2024, indicating strong lending activity.
• Net interest margin (FTE) improved to 3.24% in Q3 2025 and 3.23% for 9M 2025, primarily driven by a 34 basis point reduction in the cost of interest-bearing liabilities in Q3.
• Noninterest income saw a significant 30.6% increase in Q3 2025, largely due to the absence of $9.1 million in losses on sales of available-for-sale securities recorded in Q3 2024.
• Provision for credit losses decreased for both the three-month ($4.3 million vs. $5.0 million) and nine-month ($14.1 million vs. $31.5 million) periods, suggesting improved credit quality or lower expected losses.
• Nonaccrual loans decreased by $8.0 million from December 31, 2024, primarily in construction and commercial real estate, non-owner occupied segments.
• The Corporation maintained all regulatory capital ratios in excess of the 'well-capitalized' definition, demonstrating strong financial stability.
• Accumulated other comprehensive loss improved from $(188.685) million at December 31, 2024, to $(155.864) million at September 30, 2025.

Negatives

• Cash and interest-bearing deposits decreased by $129.7 million from December 31, 2024.
• Total investment securities decreased by $78.3 million from December 31, 2024.
• Asset yields decreased by 24 basis points in Q3 2025 and 23 basis points in 9M 2025, primarily due to lower yields on variable rate loans following Federal Open Market Committee rate reductions.
• New and renewed loan yields declined from 7.70% in Q3 2024 to 6.84% in Q3 2025, and from 7.94% in 9M 2024 to 6.95% in 9M 2025.
• Noninterest-bearing deposits declined by $190.6 million (Q3 YoY) and $190.1 million (9M YoY), reflecting client migration to interest-bearing products.
• The loan to deposit ratio increased to 91.6% at period end from 88.6% as of December 31, 2024, indicating higher reliance on loans relative to deposits.
• Total past due loans increased by $40.2 million to $156.4 million at September 30, 2025, from $116.2 million at December 31, 2024.
• 30-59 days past due loans increased by $47.7 million, mainly in construction and commercial real estate, owner occupied loan classes.
• 90 days or more past due loans increased by $0.6 million, mainly in construction and commercial real estate, owner occupied loan classes.
• Net charge-offs for the nine months ended September 30, 2025, were $12.4 million, compared to $5.1 million for the three months ended September 30, 2025.

Risks

• Fluctuations in market rates of interest and loan and deposit pricing could negatively affect net interest margin, asset valuations, and expense expectations.
• Adverse changes in the economy might affect business prospects and could cause credit-related losses and expenses.
• The impacts of epidemics, pandemics, or other infectious disease outbreaks.
• The impacts related to or resulting from recent bank failures or adverse developments at other banks on general investor sentiment regarding the stability and liquidity of banks.
• Adverse developments in loan and investment portfolios.
• Competitive factors in the banking industry, such as the trend towards consolidation.
• Changes in banking legislation or the regulatory requirements of federal and state agencies applicable to bank holding companies and banks.
• Acquisitions of other businesses and the integration of such acquired businesses.
• Changes in market, economic, operational, liquidity, credit, and interest rate risks associated with the business.
• The continued availability of earnings and excess capital sufficient for the lawful and prudent declaration and payment of cash dividends.
• Exposure to credit risk from nonperformance by derivative counterparties, although mitigated through financial reviews, policy limitations, credit ratings, and collateral pledging.
• Agreements with derivative counterparties contain provisions that could require termination or full collateralization of outstanding derivative contracts if the Corporation fails to maintain well or adequately capitalized status or defaults on indebtedness.

Future Outlook

The Corporation expects the merger with First Savings Financial Group, Inc. to close in the first quarter of 2026, subject to the satisfaction of closing conditions. Management continues to monitor economic forecast changes, loan growth, and credit quality to determine future provision needs. New accounting pronouncements (ASU 2023-09 and ASU 2024-03) are not expected to have a significant impact on the Corporation's financial statements or disclosures upon adoption. The One Big Beautiful Bill Act (OBBBA) provisions have not had a material impact on consolidated financial statements as of September 30, 2025.

Management Comments

• Our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective.
• Management believes the disclosed capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation.
• Management continually evaluates the commercial loan portfolio by including consideration of specific borrower cash flow analysis and estimated collateral values, types and amounts on nonperforming loans, past and anticipated credit loss experience, changes in the composition of the loan portfolio, and the current condition and amount of loans outstanding.
• The determination of the provision for credit losses in any period is based on management's continuing review and evaluation of the loan portfolio, and its judgment as to the impact of current economic conditions on the portfolio.
• The Corporation continues to monitor economic forecast changes, loan growth and credit quality to determine provision needs in the future.
• Management believes that the Corporation's liquidity and interest sensitivity position at September 30, 2025, remained adequate to meet the Corporation's primary goal of achieving optimum interest margins while avoiding undue interest rate risk.

Industry Context

The banking industry is experiencing a trend towards consolidation, as evidenced by the Corporation's planned merger with First Savings Financial Group, Inc. The Federal Reserve's monetary policy and interest rate changes significantly influence net interest margin and asset yields, with recent rate reductions impacting variable-rate loans and contributing to a decline in new loan yields. Client migration from noninterest-bearing to interest-bearing deposit products is a common response to the current rate environment, impacting deposit mix and funding costs. The company's focus on small business and middle market commercial, commercial real estate, public finance, and residential real estate aligns with typical community banking strategies.

Comparison to Industry Standards

• The Corporation's presentation of net interest income and net interest margin on a fully taxable equivalent (FTE) basis is noted as a standard practice in the banking industry for peer comparison purposes.
• The Corporation maintains all regulatory capital ratios (Total risk-based capital, Tier 1 capital, Common Equity Tier 1, and Tier 1 leverage ratios) in excess of the regulatory definition of 'well-capitalized', which is a key benchmark for financial health and stability within the banking sector.

Corporate Governance

Legal Proceedings

• No pending legal proceedings of a material nature, other than litigation incidental to the ordinary course of business.
• Management believes that the disposition or ultimate resolution of any routine litigation or regulatory examinations will not have a material adverse effect on the consolidated financial position, results of operations, and cash flow of the Corporation.

Stakeholder Impact

• Shareholders: Benefited from increased net income and EPS, continued cash dividends ($0.36 per share in Q3 2025), and an active stock repurchase program. The merger with First Savings will involve issuing new shares, potentially impacting ownership percentages.
• Employees: Participate in share-based compensation plans (stock options, RSAs, ESPP). The merger with First Savings Bank will lead to the integration of their employees.
• Customers: Offered a broad range of commercial and consumer banking services, including electronic and mobile delivery channels. Loan modifications are provided to debtors experiencing financial difficulty.
• Creditors: Total borrowings increased, but the company maintains strong regulatory capital ratios. Redemption of subordinated and senior debt reduces certain liabilities.
• Regulatory Bodies: The Corporation maintains all regulatory capital ratios in excess of the 'well-capitalized' definition and is subject to periodic examinations.

Next Steps

• First Savings common shareholders will hold a meeting on December 19, 2025, to consider the Merger Agreement.
• The merger with First Savings Financial Group, Inc. is expected to close in the first quarter of 2026, subject to satisfaction of closing conditions.
• First Savings intends to issue 24,000 shares of restricted stock in November 2025.
• The Corporation will continue to monitor economic forecast changes, loan growth, and credit quality to determine future provision needs.
• The Credit Facility with U.S. Bank, N.A. has an extended termination date of September 29, 2026.

Key Dates

Recommendation

The company delivered strong financial results with increased net income and EPS, driven by robust loan growth and an improved net interest margin. The strategic acquisition of First Savings Financial Group, Inc. is expected to enhance market presence and scale. While there's an increase in total past due loans, the overall credit quality remains managed, and the provision for credit losses decreased. The company's strong capital position and active share repurchase program further support a positive outlook for investors.

Keywords

Banking, Financial Services, Regional Bank, Commercial Banking, Consumer Banking, Mortgage Banking, Wealth Management, SEC Filing, 10-Q, Quarterly Report, Earnings, Net Interest Income, Loan Growth, Deposit Growth, Credit Quality, Capital Ratios, Mergers & Acquisitions, Stock Repurchase, Interest Rates, Financial Performance, FRME