First Merchants (FRME) Q3 2026 Earnings Call Transcript

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DATE

Thursday, Oct. 22, 2026

CALL PARTICIPANTS

• Chief Executive Officer - Mark K. Hardwick
• President - Michael J. Stewart
• Chief Credit Officer - John J. Martin
• Chief Financial Officer - Michele Kawiecki

TAKEAWAYS

• Net Income -- $67.8 million, or $1.09 per diluted share, representing an 11% increase from the third quarter of 2025.
• Adjusted Diluted EPS -- $1.10, excluding $0.9 million in acquisition-related expenses during the quarter.
• Net Interest Margin -- 3.44%, increasing 6 basis points from the prior quarter and 20 basis points from the third quarter of 2025.
• Net Interest Income -- $161.1 million, growing 20.5% compared to the third quarter of the prior year.
• Loan Portfolio -- $15.6 billion, reflecting 1.8% annualized growth on a linked-quarter basis.
• Deposit Growth -- 4.2% annualized linked-quarter growth to $16.9 billion, driven by private wealth and consumer banking lines.
• Nonperforming Assets -- 0.57% of total assets, remaining stable from 56 basis points in the second quarter of 2026.
• Net Charge-offs -- $29.4 million, or 75 basis points of average loans annualized, primarily driven by the resolution of two commercial credits identified in the prior quarter.
• Provision for Credit Losses -- $3.3 million, as credit costs for new nonaccrual loans were recognized in previous periods.
• Adjusted Pretax Pre-provision Earnings -- $83.7 million, an increase of 19% from the third quarter of 2025.
• Subordinated Debt -- $100 million issuance completed in late Sept. 2026, which added 60 basis points to the total risk-based capital ratio.
• Total Risk-Based Capital Ratio -- 13.58%, up from 13.06% in the prior quarter.
• Common Equity Tier 1 Capital Ratio -- 11.22%, maintaining a position well above regulatory well-capitalized requirements.
• Tangible Common Equity Ratio -- 8.83%, a decrease from 8.99% in the prior quarter due to the impact of interest rates on accumulated other comprehensive loss.
• Share Repurchases -- $12 million in common stock repurchased during the quarter, bringing the year-to-date total to $50.3 million.
• Noninterest Income -- $38 million, an increase of $800,000 from the prior quarter despite a modest decline in loan sale gains.
• Noninterest Expense -- $116.3 million, which included a $500,000 building lease impairment charge.
• Efficiency Ratio -- 54.55% for the quarter, compared to 55.09% in the third quarter of 2025.
• Credit Loss Guidance -- 38 to 40 basis points for the full year 2026, narrowed from the previously provided range.
• Tax Rate Guidance -- 14% effective tax rate projected for the fourth quarter of 2026 and for the 2027 fiscal year.

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RISKS

• President Stewart warned that the pipeline for consumer mortgages is being impacted by interest rates, stating, "The pipeline on the consumer mortgage side is definitely being impacted now," as mortgage rates remain near 7%.
• Chief Credit Officer Martin indicated that higher interest rates are affecting portfolio migration, noting, "Higher rates, you know, do have an impact, and know, portions of the investment real estate portfolio" regarding the uptick in criticized and classified loans.

SUMMARY

First Merchants Corporation (NASDAQ:FRME) reported third quarter results that featured significant net interest margin expansion and the resolution of previously identified commercial credit issues. Management indicated that fully taxable equivalent net interest income grew 20% over the past year, supported by a disciplined shift from lower-yielding investment securities to higher-yielding loans. The company completed a $100 million subordinated debt issuance to bolster its capital position and facilitate continued share repurchases. Following the retirement of CEO Mark Hardwick at the end of 2026, President Mike Stewart will assume the chief executive role, maintaining the current management team and strategic focus on organic growth within its Midwestern footprint.

• The company reported organic loan growth of 3.5% over the past 12 months when excluding the impact of the First Savings acquisition and a mortgage loan sale in the second quarter.
• Management noted that the yield on new and renewed loans reached 6.34% during the quarter, providing a continuous tailwind for the overall portfolio yield.
• President Stewart stated, "The muted loan growth this time was as much just the management of a portfolio that sat really inside the sponsor and that shared national credit where we are selectively choosing where we want to play," highlighting a shift toward core C&I and community banking.
• CFO Kawiecki reported a strategic decision to increase marketing investment, stating, "this quarter was more elevated than we had guided, and really, it kind of came from a strategic decision we made to invest more in marketing and branding."
• The bond portfolio valuation decreased due to interest rate changes, with tangible book value per share dropping 3.2% to $28.86 linked quarter.
• Management anticipates loan growth to return to a mid-single digit rate in the fourth quarter as the impact of purposeful credit exits in the shared national credit portfolio diminishes.

INDUSTRY GLOSSARY

• AOCI (Accumulated Other Comprehensive Income): A component of stockholders' equity that includes gains and losses on certain assets, such as available-for-sale securities, that are not yet realized in net income.
• C&I (Commercial and Industrial): Loans made to businesses for working capital, equipment purchases, and other business purposes.
• FTE (Fully Taxable Equivalent): A method of adjusting interest income from tax-exempt sources to make it comparable to interest income from taxable sources.
• NIM (Net Interest Margin): The difference between the interest income generated by a bank and the amount of interest paid out to its lenders, relative to the amount of its interest-earning assets.
• NPA (Nonperforming Asset): Assets, such as loans and real estate owned, that are not currently producing their contractual interest or principal payments.
• SNC (Shared National Credit): A loan or loan commitment of at least $100 million that is shared by three or more supervised healthcare institutions.
• TCE (Tangible Common Equity): A measure of a bank's capital that excludes preferred stock and intangible assets like goodwill.

Full Conference Call Transcript

Operator: Thank you for standing by, and welcome to the First Merchants Corporation Third Quarter 26 Earnings Conference Call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the future performance and financial condition of First Merchants Corporation. That involve risk 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 on today's call as well as a reconciliation of GAAP to non-GAAP measures.

As a reminder, today's call is being recorded. I will now turn the conference over to Mark K. Hardwick, CEO. Mr. Hardwick, you may begin.

Mark K. Hardwick: Good morning, and welcome to First Merchants Third Quarter 26 Conference Call. Thanks for the introduction and for covering the forward looking statement on Page 2. We released our earnings yesterday after markets closed and today's presentation materials are available via the link on Page 3 of the earnings release. Turning to Slide 3, you will see today's presenters and members of the executive management team. Joining me on today's call are Mike Stewart, our president John J. Martin, our chief credit officer and Michele Kawiecki, our chief financial officer. Slide 4 highlights our footprint and financial scale. We operate 126 banking centers across Indiana, Michigan, and Ohio.

Total assets stand at 21.1 billion with $15.6 billion in loans, $16.9 billion in deposits, and 7.1 billion in assets under advisement. Turning to Slide 5. Third quarter net income totaled 67.8 million or $1.09 per diluted share. Earnings per share are up 11% from the third quarter of last year and up nearly 30% from the third quarter of 2 thousand 24. Excluding a small amount of remaining acquisition related expenses adjusted earnings per share for the quarter totaled $1.10 Last quarter, I said that we believe that the key factors were in place for improved performance in the second half of the year. The third quarter delivered on that belief.

Net interest margin expanded 6 basis points to 3.44% our highest margin in more than 2 years, and 20 basis points higher than the third quarter of 25. Fully taxable equivalent net interest income has grown 20% over the past year. Adjusted pretax pre provision earnings totaled $83.7 million up 19% from a year ago, and an adjusted pretax pre provision ROA totaling 1.59%. Return on assets was 1.30% return on tangible common equity was 15.09%. We also made meaningful progress with the 2 commercial credits we discussed last quarter. Net charge offs on those 2 loans were in line with the specific reserves we established in the second quarter.

Non performing assets were stable at 57 basis points of total assets. Credit cost, for new non accrual loans were recognized in prior quarters keeping this quarter's provision expense to a modest $3.3 million Year to date net charge offs of 38 basis points remain consistent with the full year outlook we provided last quarter. Deposits grew $175.6 million or 4.2% annualized and noninterest bearing deposits now represent 22% of total deposits. Loan growth was more modest at 1.8% annualized. Year to date results on Slide 6 reflect the earnings power of a combined company now that First Savings acquisition and integration are fully behind us. Excluding acquisition related expenses, and the first quarter mortgage loan sale adjustment.

Adjusted EPS totaled $2.87. Up nearly 16% from the same period 2 years ago. Adjusted pretax pre provision earnings totaled $247 million up 18% from last year and 24% from 2 years ago. And our adjusted efficiency ratio improved to 53.85%. Our capital position remains strong. We completed a $100 million subordinated debt issuance in late September Our total risk based capital ratio increased to 13.58% and we repurchased 50.3 million of common stock year to date. Including $12 million in the third quarter. Tangible common equity was 8.83% with the decline in tangible book value this quarter driven by the impact of higher interest rates on AOCI rather than our operating performance.

Now Mike Stewart will discuss our line of business momentum.

Michael J. Stewart: Thanks, Mark. I will start on slide 17. Business strategy. Our primary business strategy is to build on our Midwestern strength through disciplined organic growth. Our goal is to be the bank of choice across the Midwest, earn through trusted relationships. Our 4 core business lines continue to work together to deliver financial solutions for businesses and consumers across the markets we serve. We are focused on driving organic growth by concentrating on the client segments in the markets where we hold a competitive advantage and by deepening relationships across our commercial and consumer banking. Lines of business.

We have made meaningful progress building a stronger more focused growth engine that is supported by deep client relationships disciplined capital deployment, and continued investment in the capabilities needed to serve our clients and communities. Our Midwest markets remain resilient and our relationship based model continues to create opportunities for growth As we engage with clients every day, we see businesses investing, expanding, and seeking trusted financial partners who can provide a broad range of solutions. Turning to Slide 8, a few more comments on loans. After a strong second quarter, third quarter loans, like Mark said, increased at 1.8% annualized rate. With strong growth coming from the construction and mortgage loan portfolio.

Overall, commercial loans were relatively flat as solid production did occur within our community and corporate banking segments, our asset based and investment real estate teams, but that could not outpace the normal course payoffs within the sponsor finance and the shared national credit portfolios. Pipelines overall are stable. So loan growth should continue through the fourth quarter in the mid single digits. Slide 9, deposits. We continue to focus on our deposit gathering and deepening relationships across both the commercial and consumer side of the business. Our objective is to support loan growth with strong core funding while maintaining a disciplined approach to the balance sheet. Third quarter deposits grew at a 4.2% annualized rate.

With the consumer line of business and specifically the private wealth team driving the increase. We spoke last quarter about 1 of our clients selling a business which resulted in a large and temporary increase in the commercial deposit base. That client has now moved those balances to our private client team for investment services and distributed some of the cash they needed to along the way. The 0.5% annualized year to date decline in total deposits is primarily now the result of balance sheet repositioning from the first quarter with First Savings Bank broker deposits being eliminated.

On a year to date basis, consumer non maturity deposits continue to show growth of 3% and net increases in households, and as noted on this page, our core commercial loans also grew. So I will turn it now over to Michele for her detailed summary of the balance sheet income statement. Michele?

Michele Kawiecki: Thanks, Mike, and good morning, everyone. Slide 10 covers our third quarter performance. Total revenues continued to grow in Q3 with net interest income increasing $2.1 million or 1.3% and noninterest income increasing $800 thousand linked quarter. This resulted in healthy pretax pre-provision earnings for the quarter. Tangible book value per share of $28.86 decreased $0.94 or 3.2% linked quarter due to the impact of AOCI from changes in interest rates during the quarter. Slide 11 shows our year to date results Lines 1 through 4 at the top of the page show the growth of our balance sheet over the past 12 months with loans increasing $2 billion or 14.6% and deposits increasing $2.1 billion or 13.8%.

At the same time, the lower yielding investment portfolio declined $258 million as we continued to shift our earning asset mix toward higher yielding loans. Of the $2 billion increase in loans, the majority came from the acquisition of First Savings in the first quarter. Excluding loans acquired from First Savings, and the impact of the mortgage loan sale activity in the second quarter, we generated organic loan growth of 473.7 million or 3.5% over the past 12 months reflecting continued demand across our markets.

Looking at the income statement in the middle of the page, net interest income increased $74.3 million or 18.7% benefiting from growth and lower funding costs and our year to date net interest margin of 3.39% was 16 basis points higher than the same period in the prior year. Noninterest income increased $17 million when excluding the $29.8 million loss on mortgage loans sold in the second quarter. All together, total revenue grew nearly 19% on a normalized basis with first savings contributing approximately 13% of that growth. Slide 12 shows the details of our investment portfolio.

The bond portfolio declined $168 million linked quarter to 3.1 billion due to principal paydowns and maturities as well as a decline in the portfolio valuation due to interest rate changes. Expected cash flows from scheduled principal and interest payments bond maturities over the next 12 months totaled $271.4 million with a roll off yield of approximately 2.11%. 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 loan portfolio yield increased 12 basis points from the prior quarter to 6.23%.

During the quarter, new and renewed loans originated at an average yield of 6.34% compared to 6.28% in the prior quarter which continues to be a tailwind for the overall portfolio yield and reflects the pricing discipline from our team. The allowance for credit losses is shown on slide 14. This quarter, we recorded $3.3 million in provision and had net charge offs of 29.4 million As a result, the allowance for credit losses totaled 215.5 million at the end of the quarter representing a coverage ratio of 1.38%. Slide 15 shows details of our deposit portfolio.

Total deposits grew to 60.9 billion this quarter, and the rate paid on deposits increased 9 basis points to 2.16%, reflecting the competitive deposit pricing in our markets. Next, slide 16 shows a continued favorable net interest margin trend. Our net interest margin of 3.44% increased 6 basis points from prior quarter and 20 basis points over the past year. The yield on earning assets shown on line 4 increased 10 basis points to 5.56% driven by higher loan yields which more than offset the 4 basis point increase in interest expense shown on line 5.

When comparing to the same period in the prior year, the yield on earning assets nearly returned to that level in the prior year, yet interest expense was 22 basis points less creating an attractive earnings profile. Next, on slide 17, Shows the details of noninterest income, which totaled $38 million for the quarter, an increase of $800 thousand over prior quarter. Customer related fees shown on the bottom right of the page totaled 34.3 million and were consistent with the prior quarter as growth in service charges, wealth management fees, and card payment fees offset a modest decline in gains on sales of loans.

Moving to Slide 18, noninterest expense for the quarter totaled 116.3 million and included $900 thousand in acquisition related costs. Excluding acquisition costs, noninterest expense increased 3.9 million over the prior quarter, driven by higher marketing expense, employee health insurance costs, and $500 thousand on an impairment charge of a building lease. Slide 19 shows our capital ratios. The tangible common equity ratio declined 16 basis points to 8.83% due to the impact of AOCI but remains well above our 8% target. During the quarter, we purchased 287 thousand shares for $12 million bringing total share repurchases year to date to just under 1.3 million shares for $50.3 million.

The $100 million subordinate debt issuance we completed during the quarter increased our total risk based capital ratio by 60 basis points bringing it to 13.58%. We remain well capitalized with the common equity tier 1 ratio at 11.22% and are well positioned to support continued balance sheet growth and disciplined capital return. That concludes my remarks, and I will now turn it over to John J. Martin to discuss asset quality.

John J. Martin: Thanks, Michele, and good morning. My remarks begin on Slide 20. Overall, the loan portfolio remains well diversified across commercial and consumer lending categories. With total loans of $15.6 billion at quarter end. Commercial real estate concentration levels remain well within regulatory guidelines with total CRE at 182% of total risk based capital and construction at 42% leaving meaningful capacity relative to the regulatory concentration thresholds of 300% and 100%, respectively. Within the commercial portfolio, line utilization remains stable at approximately 49%, Shared national credit exposure declined to $936 million across 88 borrowers, while sponsor finance totaled approximately $811 million across 91 companies in diverse industries.

Overall, these measures continue to reflect a diversified portfolio and a disciplined approach to concentration and structural risk management. Turning to slide 21. Third quarter asset quality activity primarily reflects the continued resolution and migration of previously identified problem credits rather than broad based deterioration across the portfolio. We recognized approximately $29 million of charge related to the authorized wireless retailer and commercial and residential roofing contractor discussed last quarter with the associated provision expense having been recognized in the prior quarter.

We also moved 2 larger relationships to nonaccrual during the quarter, an $18.4 million auto parts distributor and a $4.3 million digital marketing firm, Both had been under stress for multiple quarters and had already been downgraded specifically evaluated and specifically reserved in prior quarters. Before moving to nonaccrual in the third quarter. That timing is important to understand--the core is important to understanding the quarter. Although these relationships were newly reported as nonaccrual in the third quarter, the expected loss content had already been recognized through specific reserves established in prior periods.

Consequently, their migration to nonaccrual did not create a significant new provision requirement As such, total third quarter provision expense of $3.3 million was deemed sufficient to cover growth new credit migration, and the impact of the economic forecast. We expect these new non accrual relationships to be resolved during the fourth quarter. Moving to slide 22. Net nonperforming asset migration was essentially flat during the quarter. New non accrual inflows including the 2 relationships just discussed, and several smaller additions, were offset by charge offs and other resolution activity. The significant charge offs recognized this quarter were tied to the loss content of credits that moved to nonaccrual last quarter and had been reserved for at that time.

In summary, reported credit activity remained elevated as we continue to work through a limited number of known problem relationships. However, the quarter did not reflect a comparable increase in newly identified loss content. The largest charge offs were previously provided for, and the largest new non accruals had specific reserves established in prior quarters. Outside of these relationship specific credits, portfolio performance remains generally stable, We remain focused on proactive portfolio management timely recognition of risk, discipline reserving, and the orderly resolution of problem assets. I will now turn the call back over to Mark.

Mark K. Hardwick: Thanks, John. Turning now to slide 23, our long term track record of shareholder value creation remains a key strength and a priority. Over the past decade, earnings per share has grown at an 8.5% compound annual growth rate. Dividends per share at 13.3%, and tangible book value per share, excluding AOCI, at 8.5%. Slide 24 highlights our 11.2% 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. Before we open the line for questions, I would like to take a moment on a more personal note.

As we previously announced, I will retire at the end of this year, and Mike Stewart will succeed me as chief executive officer. As such, this will. this is my final earnings call. I joined First Merchants in November 2000 as corporate controller Over the past 29 years, I have been privileged to serve as chief financial officer, chief operating officer, and now chief executive Those last 3 positions over the. Over a 24 year period. I could not have asked for a better place to spend my career. To our 2.2 thousand teammates, thank you. Your dedication to our clients and our communities is what makes First Merchants special.

And it is been an honor it is been the honor of my professional life to work alongside all of you. To our clients, thank you for trusting us with your financial lives and your businesses. To our board of directors, thank you for your guidance, your support, and your confidence over many years. And to our shareholders and the analysts on this call, many of whom I have known since my early days as chief financial officer. Thank you for your interest. Your challenging questions, and your investment in First Merchants. Those conversations have made us a better company. I have great confidence in Mike, he is been a trusted partner for 18 years. He knows our clients.

He knows our markets. he is built strong teams across all of our lines of business. And together with Michael, John, and the rest of our leadership team, Mike and First Merchants are well positioned to build on our Midwestern strength deepen our client relationships, and deliver sustainable earnings growth and shareholder value. This company is in excellent hands and I look forward to cheering on First Merchants as a shareholder. Thank you for your continued support and investment in First Merchants. And operator, we are ready to take questions for the last time.

Operator: Thank you. If your question has been answered or you wish to move yourself from the queue, please press 1-1 again. Our first question comes from Daniel Tamayo with Raymond James. Your line is open.

Daniel: Thank you. Good morning, everyone. First, just wanted to say congrats on your retirement mark. Good luck in your endeavors, and we will definitely miss you on the call here. And then you know, in our dealings with First Merchants. And then congratulations to Mike on the new role. I guess my first question is just probably for John, actually, on credit cost.

John J. Martin: I appreciate all the detail on the near term. So I just want to make sure that we kind of understand that. So the way to think about it is the 22 and change million of new nonaccruals will be charged off in the fourth quarter Is the way to think about that, the reserve should be relatively stable as a percentage of loans going forward? And is there anything else in terms of specific reserves that we need to be aware of, kind of near term?

Michele Kawiecki: Yeah. Let me. Daniel, let me clarify. We are not going to charge off the full amount of those loans. And I think the way to think about it last quarter, I guided for the full year between 40 and 45 basis points for the year. And then kind of after reviewing those names and the portfolio for the end of the year, I would probably guide towards the lower of those 2. it is probably closer to 40. 38 to 40 basis points for the remainder of the year. Not for the quarter, but for the full year annualized. Or for the full year. Yep. That makes sense?

John J. Martin: Yeah. that is helpful, John. Anything on the on the reserve levels going forward? And anything else in terms of specific reserves that we need to be aware of? You know, I think in terms of the reserving level, it is at this point, you know, the reserving is gonna largely be related to portfolio growth for, again, into the fourth quarter, as it relates to specific reserves or new specific reserves into the fourth quarter, I am not seeing or expecting anything at this point outside of, you know, what is previously been specifically reserved for. Okay.

Daniel: The increase in. I apologize. I think I am I am remembering this correctly. There was an increase in criticized, small if it was, but anything to kind of read into with that other than you know, there is a lot of moving parts. But Right. Any color you can provide on that.

John J. Martin: No. You know, the. They are both the criticized and classifieds were up somewhat for the quarter, but it was not related to you know, an individual large name or like that. it is just kind of normal migration that we see quarter to quarter. Higher rates, you know, do have an impact, and know, portions of the investment real estate portfolio, but it is not really a broad based concern that I have as it relates to the portfolio. it is just kind of new migrations that kind of come in and go out.

We are constantly reviewing the portfolio and looking at grades and you know, how the borrowers are performing and in any given quarter, you can see an uptick or a downtick, but there is nothing there that I am concerned with at the moment. Okay.

Daniel: Last question, and I will just keep it on the same topic. On credit. You know, just maybe help us given the volatility around credit kind of this quarter and next quarter, where and next quarter where you think the more normalized level should be kind of post that as we as we look into 2027? From a from a--yeah, either a provision or charge off perspective. Thanks.

John J. Martin: Oh, from a provision or charge off perspective. You know, I had been kind of pre-the last quarter saying it was between 15 and 20 basis points. I would say probably on a more normalized basis, we are probably in the 20 to 25-basis point range. Would be a normal. Kind of a more normalized charge off run rate.

Michele Kawiecki: And in terms of the provision expense, it will just obviously keep up with that, Michele. Yeah. And just to give you a little more color around provision, I mean, I think once John once we have these other large credits resolved and coming out of nonperforming in Q4. Would expect the specifics maybe to resolve around $10 million or so. So when you think about coverage ratio, it will be somewhere between, like, that mid 1 Right now, we are at 38. It will be, you know, low to mid 1 thirties, and that kind of coverage ratio is what we will expect to have going forward with new growth. Okay.

Daniel: Great. Thanks for all the color, John, Michael. I will step back.

Operator: Thank you. 1 moment for our next question. Our next question comes from Russell Gunther with Stephens. Your line is open.

Russell Gunther: Good morning. Wanted to begin--yeah, morning. On the loan growth discussion. So appreciate the color you shared in terms of growth coming in a little lighter this quarter and sounds like you expect to return to your more traditional mid single digit clip in 4Q. Could you just give us a sense of the drivers or kind of mix of the anticipated growth next quarter? And then, you know, perhaps bigger picture, is there an absolute level of rates where you start to see demand destruction or pipeline fallout that puts that kind of 6% to 8% growth target at risk.

Michael J. Stewart: Sure. Mike Stewart here. Go back to your first part of that question. The muted loan growth this time was as much just the management of a portfolio that sat really inside the sponsor and that shared national credit where we are selectively choosing where we want to play and how much we want to continue to grow that portfolio, If you look at the rest of the production level through the commercial book of business that what we call the community corporate bank and the investment real estate, and what we do with asset based lending, there was really good production numbers in those. So which is what I like.

And to that point, those pipelines continue to be at really good levels. And the expected payoffs and or purposeful credit exits probably will not be at that same level in the fourth quarter. So back to that mid single digit expectation of loan growth. And I. Like I said, I am seeing that through our geographies, and I am seeing it through how we segment or go to market on our commercial business lines. When I go back to your second part of that question, interest rates and impact, Well, the pipeline on our consumer mortgage is definitely showing softness.

You get mortgage rates that have a 7 You know, the refi business was already kind of slowing out nil. And purchases just became. just become a little bit less active, so to speak. So the pipeline on the consumer mortgage side is definitely being impacted now. That level is still a good level. it is just not where it would have been a year ago. When we look year over year understanding seasonality and quarter over quarter. When you look at.

And to John's point, maybe, you look at where the interest rate impacts would be on a commercial portfolio, it is not bringing credit issues to bear, but it is having certain real estate projects potentially be rethought or business owners rethinking how they wanna potentially do some capital expenditures or do an acquisition. So that is just an end-of-the-year mentality maybe. Maybe it is rate. Maybe it is still a little uncertainty with tariffs and the general temperature, throughout business minds. But right now, I do not view interest rates hurting demand except for on the consumer mortgage.

Russell Gunther: Okay. Got it. that is, very helpful. Thank you. And then switching gears, to the margin, Michele, it would be helpful to get your thoughts in terms of potential continued expansion. In the coming quarter and maybe focusing on loan yields. You know, appreciate where you shared where new production came on at. Perhaps if you could touch on kind of where they exited the quarter in September, and bigger picture, just what type of loan yield beta you would expect in a rising rate environment.

Michele Kawiecki: Yeah. Good morning. Well, looking at our Q4 margin--I mean, I would expect our Q4 margin to be stable Normally, when we get a rate increase like we did in September, we would see our margin tick up a basis point or 2 because of our asset sensitive balance sheet. And the fact that we have got some really great tailwinds on asset repricing, not only on the loan side, but also on the bond portfolio. But I just wanted to remind you, I mean, this fourth quarter will be the first quarter that we will be absorbing a full quarter of interest expense from the sub debt, so that will offset a little bit of that increase.

When I look at September, our September loan yields were down a little bit. It just simply because we had kind of flat growth in September and loan fees were lower. So I do not really use September kind of as an indication of where I think it is going to go. I feel like fourth quarter will be when you look at third quarter to fourth quarter, we should see loan yields increase interest income increasing. And so once we kind of normalize with our sub debt expense, I think when you look into 2027, we will continue to see a little bit of lift in margin.

Russell Gunther: Okay, great. Very helpful. Thank you, Michele. And then just if I could sneak 1 more in on expenses. So results this quarter, I think a little higher than what I was thinking about at least. And maybe above where you would thought about, exiting the year around $114 million. So have your thoughts changed at all in terms of, you know, the near-term expense outlook in 4 q and then perhaps bigger picture as we start to think about for next year? Is there sort of a normalized growth rate to contemplate that would kind of cover your anticipated investment in tech and talent? And does that translate to positive operating leverage?

Michele Kawiecki: Yeah. It is higher. This quarter was more elevated than we had guided, and really, it kind of came from a strategic decision we made to invest more in marketing and branding. Not just this quarter, but even on a go forward basis. To help us kind of win organically, particularly in the deposits in our markets. And so I do think for this Q3 run rate, is a good run rate to use for Q4. And I think when we look into 2027, as I have guided before, I think it is 3% to 5% expense increase on top of that is really what I think would make sense for us Got it.

Russell Gunther: Okay. that is it for me, guys. Thanks for taking my question.

Operator: Thank you. 1 moment for our next question. Our next question comes from Damon DelMonte with KBW. Your line is open.

Damon Del Monte: Hey, good morning, everyone. First off, Mark, congrats on the upcoming retirement. Been a pleasure working with you over the last decade or so, and wish you nothing but the best going forward. And, Mike, welcome to the new role. Gotten to know you in the last few years. So look forward to continuing, the journey with you. My first question, probably more for Michele here on fee income. You know, mortgage banking held up pretty well this quarter. But as we progress through the quarter and then with the rate hike and kind of where mortgage rates have been, last couple weeks, it seems like it is becoming a more challenging environment.

So just curious on your thoughts on kind of gain-on-sale income here in the fourth quarter and then kind of how that translates into an outlook for all of noninterest income?

Michele Kawiecki: In the fourth quarter. Yeah. I mean, for fourth quarter, I mean, I feel well, I should say first, we had just a couple of onetime items, some CRA income and so forth. It really amounted to maybe $700 thousand. It was relatively needed that will not recur in Q4. And as Mike said, you know, I do think that maybe gains on sale of loans could be a little bit softer. But by and large, we feel like we should be able to deliver a pretty consistent level of fee income in Q4 that we did in Q3.

Michael J. Stewart: And talk about the new verticals that we have and some of the gain on sale. We would not have had this time last year. When I think about the SBA business and the first lien HELOC business. We are picking up some gain on sale there that we would not have had a year ago.

Damon Del Monte: Got it. Okay. Okay. And then as you look out into 2027, you know, do we think about kind of, you know, card payment and wealth management as being like high single digit growth engines for you there?

Michele Kawiecki: Yeah. I mean, I think, when we look at particularly the client related fee categories, which we break out on our slides, you know, we do expect those categories to grow kind of in that higher single digit somewhere between, like, that 8% to 10% rate So that is what we would expect for 2027.

Damon Del Monte: Okay. Great. And then I guess lastly, with the sub debt offering, I think you noted at the time of that, that gives you more flexibility to remain supportive of the shares with a buyback. So just curious on your thoughts. Are you still kind of committed to that? Can we expect additional buyback over the coming quarters?

Michele Kawiecki: Yeah. Definitely. You know, we were in a black. We were in a quiet period really, I think, so far through this quarter just because of earnings and other announcements and so forth. But we will use some of that sub debt to buy back shares and I think you will see an elevated level of share buyback in Q4 maybe potentially in Q1 as well. But it is our intention to continue to stay in the repurchase game Okay.

Damon Del Monte: Great. Well, thanks. And, Mark, good luck. We will talk soon.

Mark K. Hardwick: Yeah. Thank you, Damon.

Operator: You. 1 moment for our next question. Our next question comes from Nathan Race with Piper Sandler. Your line is open.

Nathan Race: Just want echo the earlier comments.

Mark K. Hardwick: Congratulations. Mark.

Nathan Race: And Mike, look forward to working with you in the future. More so. Just wanna clarify going back to John's comments around kind of the near-term provisioning outlook. it is. Does not sound like you expect provisioning to cover the expected charge offs in the fourth quarter just given that you have some specific allocations already in place. Is that the right way to think about it?

John J. Martin: Yes. Yeah. Okay. The new non accruals that you know, are working their way through obviously, those are the ones that are specifically reserved for in prior quarters. And are in the allowance Okay.

Nathan Race: Great. And then Michael, if you are just going back to your comments around, kind of, you know, hopefully getting to the kind of middle to lower end of the range of the 3% to 5%. Expense growth outlook for next year. I am just curious, 1, if you could confirm that and, 2, to what extent are any kind of commercial banker or other kind of production-related hires contemplated in that figure? To the extent you are seeing kind of opportunities or disruption across your footprint to, add some high quality folks?

Michael J. Stewart: Yeah. I will hit a little bit on that. We are remaining opportunistic and open to what might be coming our way, especially in the Michigan market. We are now on the back end of the integration. Of the Fifth Third-Comerica, and individuals are becoming available, so we are actively looking at where we could add bankers that would immediately add value.

Michele Kawiecki: So if there is any increase on the salary side, I would expect to see the result increase on level of production When you think about other areas in which right now, I feel like we have got a really strong core team. We have built out and invested in some teams the last 18 months that have been benefiting us.

Michael J. Stewart: So absent Michigan market, I think that is about the only place we will continue to look heavy Okay.

Nathan Race: Great. And then, Mike, while I have you, just, you know, as you are taking over as CEO, and I know it is kind of early days in the transition period, just given the announcement last month. But just curious as you take the seat, is there any kind of particular initiatives that you are looking to accelerate? Or any potential changes that we can expect or any kind of balance sheet optimization that maybe looking at just to, maybe kind of enhance the earnings power? company going forward?

Michael J. Stewart: Yeah. We have been talking a lot about those things. I wanna go back a little bit that you know, Mark's retirement really is nothing more than his opportunity in front of him. So the consistency of First Merchants and continue to execute with the existing executive team and the senior management team for me is job 1 is to build that consistency and assure that our clients and the rest of our teammates and you, our shareholders, have great comfort of that. As we look into 2027, we can look at things from a budget point of view, but we are also looking at things strategically.

And we are really, deep into an initiative that I started and Mark's been supportive of a year ago to really analyze, and build a strategic plan that helps us with choices. We have got a nice. A varied balance sheet. We have got opportunities to continue to improve how we want to resource our teams and our staff and we are gonna make those come to life with all in the idea that we can continue to grow our earnings per share and our tangible book value. And it means that, it brings us back to some really strong valuation.

Nathan Race: Okay. Good stuff. And if I could just sneak in 1 more housekeeping question. I apologize if I did not catch it, Michele, but just on the tax rate, for the fourth quarter and into 2027.

Michele Kawiecki: 14%, I think, would be a good effective tax rate to use for the modeling.

Nathan Race: Good. Great. I appreciate all the color. Everyone.

Operator: Thank you. 1 moment for our next question. Our next question comes from Brian Martin with Janney Montgomery Scott. Your line is open.

Analyst: Hey, good morning, everyone, and congrats to you guys, both on different roles here. I look forward to working with you, Mike, and, Mark, it is been a great journey over the years, and I wish you all the best in your retirement. So maybe just the first 1 for me was just on Mike, you talked about on kind of the loan pipelines and consumer where it is at. Maybe can you just give a little, you know, color, just some thoughts on where you are seeing the most opportunity on the commercial side as you look into 4Q and next year, given that seems to be a bigger focus given the consumer side at least right now.

So just on kind of what you are thinking about it. You already touched on the, you know, potential rate outlook impact. So just, you know, or maybe it is for John. Either 1 of you.

Michael J. Stewart: Well, we can both do it together. I think that where we are still seeing the best momentum and you see it continue in our pipeline is what we call in our community and our corporate bank. So in the market, bankers working with the businesses, that are right in our backyards, good C and I activity, outworking our competition, being in the Midwest, offers us some stability and growth opportunities as these owners are evaluating their plans into 2027. that is where I see the continued growth happen.

John J. Martin: Yeah and I would agree. You know, the opportunities that we continue to see are our core C&I and even on a somewhat accelerated basis, the ABL, the asset based lending, portfolio where you have borrowers who need liquidity to grow their businesses, and, we have a quality group of individuals that have the controls and portfolio management skills that have allowed us to originate some real nice opportunities. So couple of places there. Investment real estate, you know, with higher rates, it does have an impact, but, you know, as long as they meet the capital hurdles, we can still. we still are finding opportunities there as well as some low income housing tax opportunities.

Still continue to still continue to see those as well. So there is a lot of opportunities across the portfolio.

Analyst: Okay. And those pipelines are both up from where they were a quarter ago or stable? Or just, you know, how are the pipelines?

Michael J. Stewart: Yeah, those are, you know, in some segment, part of those. That commercial pipeline, it is modestly up. Quarter over quarter. I also look at things seasonal year over year, and it is stable to that means as well. Gotcha.

Analyst: Okay. And then, secondly, maybe just for Michele on the margin--I mean, I guess, thanks for the comments on the fourth quarter and where the balance sheet's positioned here. Just maybe 2 things. Just with the rate environment and a couple rate hikes, can you just remind us of, you know, the impact from rate hikes and just how you are thinking about if we get a couple hikes going into, you know, the next couple quarters, how that plays out, and then just remind us the level of fixed rate loans in 2027 kind of what is repricing there?

Michele Kawiecki: Sure. Yeah. So with each 25-basis point rate hike, we typically see margin increase 1 to 2 basis points. And so as I said, you know, normally, we would see 1 to 2 basis point lift with the September rate hike, but we are adding the cost of the sub debt, which will partially offset that. I think if we get an additional rate hike or 2, you will see some of that additional lift And so I think that is the way you can think about it. On the fixed rate portfolio over the next 12 months, we have got about 350 million that is at a 4.90 rate. That we will reprice.

Analyst: Gotcha. Okay. Perfect. My other ones were already asked, so thanks for the time, guys.

Operator: Thank you. 1 moment for our question. Our next question comes from Brendan Nosal with Hovde Group.

Brendan: Hey, good morning, folks. Hope you are doing well. Just 1 for me at this point. Notice that the. the SNC book was down from $1 billion to $936 million quarter over quarter. Just kind of curious if this was due course in the book or if this was the result of anything intentional that you implemented in the portfolio following last quarter's wireless carrier credit out of that book?

Michael J. Stewart: it is a little bit of both. Those account declines were. You know, they were coming up for just normal renewals or had some request in front of us. I mean, you know, we always look for how well have we cross sell the opportunity, what is the return we are getting on the opportunity, and where does it fit within our hold levels. And it is, all those transactions felt like they were ones we would be better not participating in.

Brendan: Got it. And then to the extent that you have additional renewals coming up, Is more work that you would do in that portfolio just to kind of, you know, realign it with where your risk appetite is at now, or is most of that work complete at this point?

Michael J. Stewart: I do not really have a good view on what is coming at us in the fourth and the first quarter as far as what is on their minds with we have got a really strong team in that area as well and we do have some fantastic relationships in that book of business. So it is just like anything. We look at it on a an individual basis, each time, and it is it will be, once something that we will evaluate. But I do not think there is any changes in front of me right now. I am looking at John as I say that.

John J. Martin: Yeah. Yeah. it is--I would just repeat the first part of Mike Stewart's answer. In that, you know, we are looking at them transaction by transaction. it is not like we instituted a core portfolio model change or something of that nature. We look at you know, relationships as they come up and I think from my seat, as they come through and we discuss them, we are looking at the pricing, the cross-sell, the opportunity, how it fits to what happened last quarter as it relates to, you know, potential for loss and how much you know, maybe unsecured. Not unsecured, but air, to use a term in the transaction.

But you know, that is. it is a risk management and, return exercise.

Brendan: All right. Fantastic. Thanks for taking my questions.

Operator: And I am not showing any further questions at this time. This concludes today's conference. Thank you for your participation. Have a great day. You may now disconnect.

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