FRME

• Core Strategy

  • Primary strategic objective remains organic growth of the company's Midwestern footprint, complemented by disciplined value-accretive acquisitions.
  • The completed acquisition of First Savings added 126 banking centers and expanded the firm's presence in Southern Indiana; integration and cost synergy targets are on track, and all integration work is complete.
  • The previously announced mortgage loan sale is finalized, adding $271 million in liquidity to the balance sheet.

• Balance Sheet & Capital Management

  • The firm is repositioning its balance sheet to a more favorable earning asset mix: reducing low-yielding bond and mortgage portfolios, and redeploying capital into higher-yielding loans.
  • Tangible common equity ratio remains strong at 8.99%, and the firm has completed just under 1 million share repurchases for $38.3 million year-to-date.
  • Proceeds from the mortgage loan sale were used to reduce higher-cost brokered and wholesale deposits, improving the firm's funding mix and lowering overall deposit costs.

• Asset Quality Overview

  • Overall loan portfolio performance remains in line with expectations and is well diversified; commercial real estate concentration stays comfortably within regulatory guidelines.
  • Q2 results were negatively impacted by two commercial loans moved to non-accrual status, for which $29.7 million in specific reserves were recorded. These two downgrades are not representative of broad portfolio health, per management.
  • Active management of problem assets continues, with $17.7 million in upgrades and payoffs and $6.2 million in charge-offs/resolutions offsetting new non-accrual additions in Q2.

• Operational Performance

  • Revenue grew 18% year-to-date 2026 (normalized) compared to 2025, with the First Savings acquisition contributing 12% of that growth. Disciplined expense management generated 2% positive operating leverage in Q2.
  • Deposit costs declined to 2.07% in Q2, and pricing discipline on both loans and deposits drove net interest margin expansion through the first half of 2026.

• Loan growth: Management reaffirms guidance for mid single-digit full year 2026 loan growth, in line with prior outlooks.
• Expenses: The quarterly non-interest expense run rate guidance of $111 million to $114 million for the remainder of 2026 is maintained; long-term normalized organic expense growth is expected to remain in the 3% to 5% range.
• Net interest margin: Assuming no changes to the Fed funds rate through the end of 2026, management expects net interest margin to increase by a couple of basis points in the second half of 2026, maintaining the positive expansion trend.
• Net charge-offs: Full year 2026 net charge-offs are expected to land in the 40 to 45 basis point range, an increase from the Q2 annualized rate of 10 basis points, driven entirely by the resolution of the two known non-accrual credits.
• Non-interest income: Full year 2026 non-interest income is expected to be 10% higher than 2025.
• Effective tax rate: The expected full year 2026 effective tax rate is 13%.
• Capital allocation: Share repurchase activity is expected to continue for the remainder of 2026, under the existing $100 million approval.

First Merchants is organized into two core lending segments (commercial and consumer) with supporting fee-based business segments:

1. Commercial Lending: Drove nearly 6% annualized loan growth in Q2 2026, led by community, corporate, asset-based, and investment real estate lending. The total held for investment commercial loan portfolio makes up the majority of the firm's $15.5 billion total loan book, with portfolio yield increasing 2 bps quarter-over-quarter to 6.11%. New and renewed commercial loans originated at an average yield of 6.28% in Q2, up 10 bps from Q1.
2. Consumer & Small Business Lending: Contributed to overall 6% annualized second quarter loan growth alongside commercial lending. Mortgage origination pipeline is up substantially year-over-year, with HELOC originations from the acquired First Savings franchise up 10% quarter-over-quarter. Seasonal consumer deposit declines driven by tax refund spending were observed in Q2, but consumer non-maturity deposits grew 3% year-to-date.
3. Wealth, Trust & Fee-Based Businesses: Contributed to strong $37.2 million in Q2 non-interest income, with notable growth in loan sale gains and derivative hedge fees. SBA lending from the First Savings acquisition operates as a stable fee-generating vertical, with flat originations quarter-over-quarter and expanded footprint across First Merchants' core markets.

Overall Q2 2026 financials: Reported net income of $43.5 million ($0.70 diluted EPS); adjusted pre-tax pre-provision earnings of $84.6 million (up 7.5% from Q1 2026); net interest margin expanded to 3.38%; total assets of $21.3 billion, total loans of $15.5 billion, total deposits of $16.8 billion.

• Two large commercial credits ($28.1 million syndicated wireless retailer credit, $13.7 million roofing contractor credit) were moved to non-accrual status in Q2, requiring $29.7 million in specific provisions. Resolution of these credits will lead to elevated charge-offs in the second half of 2026.
  • The wireless retailer credit's performance was negatively impacted by a sudden, dramatic shift in its parent carrier's retail distribution model, with changes materializing late in Q2. Resolution is not expected to be finalized until the end of Q4 2026.
• Competitors in First Merchants' core markets are offering high-yield CD specials, which creates pressure to maintain deposit pricing discipline and keep deposit costs down.
• Normal consumer deposit attrition following the First Savings acquisition is ongoing, though it remains within management's projected model.
• Shared national syndicated credits carry idiosyncratic borrower-specific risk; the firm is conducting a full portfolio review following the wireless retailer downgrade.

Q: Daniel Tamayo of Raymond James asked how management views the shared national credit business line going forward after the Q2 wireless retailer downgrade, and what the reserve outlook is for the rest of the portfolio. / A: Management stated the firm still likes the shared national credit (SNC) business, as it only participates in SNC for borrowers based in its core Midwest footprint where it already has existing multi-line relationships. The portfolio is granular, and the Q2 issue was isolated to this single borrower. Management added that a full review of the entire SNC portfolio is underway to confirm its comfort with the current approach, and no broad-based challenges have been seen in the rest of the portfolio. (358 characters)

Q: Damon Del Monte of KBW asked if the two credit downgrades changed management's plans for ongoing share repurchases, given healthy current capital levels. / A: Management confirmed it expects to continue share repurchase activity for the remainder of 2020 at current stock price levels, under the existing $100 million board and Fed approval. Approximately 30-40% of annual capital generation is allocated to supporting loan growth, one third to dividends, and the remaining excess capital is still best deployed via share repurchases at this time. The two credit downgrades did not change this capital allocation plan. (347 characters)

Q: Brendan Nassau of Hov Group asked for additional details on what caused the wireless retailer syndicated credit downgrade, and if there are read-across to other credits in the same sector. / A: Management explained the credit was moved to watchlist in Q1 and classified in Q2, as the borrower's parent carrier made a sudden, dramatic shift to its retail distribution model that negatively impacted the borrower's business, with the full impact only becoming apparent late in Q2. Management noted it has other wireless retail exposure, but it is tied to different carriers and is unaffected by this specific shift. No broad sector risk is seen from this event. (362 characters)

Q: Nathan Ray of Piper Sandler asked for an update on First Merchants' current M&A appetite, after several quarters of focused internal execution. / A: Management confirmed its focus remains on internal execution and organic growth of the existing franchise, unchanged from prior quarters. M&A activity is very quiet in the firm's three-state core footprint, and management is not actively seeking transformational deals. Management would only consider small, easily digestible targets with a strong deposit base and low loan-to-deposit ratio if the right opportunity arose. (324 characters)

Q: Russell Gunther of Stevens asked for management's outlook for net interest margin in the second half of 2026, including assumptions around Fed rate changes and loan yield trends. / A: Management's baseline outlook assumes no Fed rate changes for the rest of the year, and expects net interest margin to rise by a couple of basis points in H2 2026. New and renewed loan yields came in at 6.28% in Q2, up 10 bps from Q1 and above the current overall portfolio yield of 6.11%, which creates ongoing upward momentum for portfolio yields. Approximately $385 million in lower-yielding fixed rate loans will reprice over the next 12 months, adding additional upside to margin. (391 characters)