First Merchants (FRME) Q1 2025: Deposit Costs Drop 20bps as Loan Growth Holds at 4.8%
First Merchants opened 2025 with disciplined deposit cost management and robust commercial loan growth, reinforcing its core regional banking model. The bank’s focus on pricing discipline, capital flexibility, and organic growth is evident in both its operational execution and capital allocation. Management’s guidance remains steady despite market volatility and tariff-driven uncertainty.
Summary
- Deposit Cost Control: Aggressive repricing and product mix shifts drove a 20 basis point reduction in deposit costs.
- Commercial Lending Momentum: Commercial and industrial (C&I) loans expanded across all markets, offsetting real estate headwinds.
- Capital Actions Signal Confidence: Share buybacks and sub-debt redemption highlight management’s conviction in intrinsic value.
Performance Analysis
First Merchants delivered a solid first quarter, marked by 4.8% annualized loan growth and a 23 basis point increase in return on assets. Commercial lending continues to anchor growth, with the $9.8 billion segment driving a 7% annualized increase, powered by C&I expansion and active client acquisition across Indiana, Michigan, and Ohio. The consumer mortgage business also contributed, with unit volume and dollar volume up more than 15% and 30% year-over-year, respectively.
Deposit management was a clear operational highlight. Total deposits declined modestly, but core relationship balances were stable, and the cost of deposits fell 20 basis points to 2.23%—a notable achievement in a competitive rate environment. Net interest margin (NIM) compressed six basis points to 3.22%, though management emphasized that, after adjusting for day count, margin was stable quarter-over-quarter. Non-interest income was seasonally lower but up year-over-year, with mortgage and wealth management expected to drive double-digit growth for the full year.
- Commercial Lending Drives Growth: C&I loans grew $248 million, offsetting softness in investment real estate.
- Deposit Cost Discipline: Interest-bearing deposit costs declined 25 basis points, reflecting strong pricing leverage.
- Expense Controls Hold: Non-interest expenses fell $3.4 million sequentially, keeping the efficiency ratio at 54.54%.
Capital levels remain robust, with tangible common equity at 8.9% and common equity Tier 1 at 11.5%, supporting both organic growth and opportunistic buybacks. Asset quality is stable, with net charge-offs at 15 basis points annualized and non-performing assets at 0.7% of loans.
Executive Commentary
"While we are very pleased with the progress we've made increasing earnings and profitability over last year, the volatility in the market has clearly had an impact on our share price. While it's frustrating, it's not something that we can directly control. But we can take advantage of it by buying back our shares."
Mark Hardwick, CEO
"We continue to demonstrate effective expense discipline to maintain our efficiency ratio, which was 54.54% for the quarter. These strong capital ratios, along with our ample loan loss reserves, provide immense balance sheet strength against any economic uncertainty we may face this year, and also provides great strategic flexibility."
Michelle Kaviaski, Chief Financial Officer
Strategic Positioning
1. Commercial Banking Focus
FRME’s business model is anchored in commercial lending, with C&I loans as the principal growth engine. Management highlighted that M&A and capital expenditure pipelines funded in Q1, and revolver utilization increased as clients drew down cash balances and responded to inflationary inventory pressures, possibly tied to tariffs. The bank’s regional focus in Indiana, Michigan, and Ohio remains unchanged, with active relationship management supporting ongoing loan growth.
2. Deposit Cost and Mix Management
Deposit cost control is a core lever for margin stability. Management shifted away from high-cost public funds and maturity deposits, focusing on nurturing core relationship balances. The deposit beta, or sensitivity of deposit costs to market rates, was managed downward, providing insulation against future rate cuts. This approach supports both near-term earnings and long-term franchise value.
3. Capital Allocation Discipline
FRME is deploying excess capital through buybacks and selective debt redemption. The new $100 million share repurchase authorization and $10 million already repurchased signal management’s confidence in the bank’s valuation. Redemption of $30 million in sub-debt further optimizes the capital structure. M&A remains opportunistic, with no near-term deals expected given market volatility and a preference for organic growth.
4. Asset Quality Vigilance
Credit quality metrics remain strong, with non-performing assets low and reserves at 1.47% of loans (1.6% including fair value marks). The team is proactively monitoring potential impacts from tariffs, especially in C&I and sponsor finance portfolios, but has not identified material credit deterioration. Construction and sponsor finance borrowers are reportedly hedging input costs and adjusting underwriting to account for tariff effects.
5. Fee Income and Non-Interest Revenue
Non-interest income is expected to grow mid to high single digits year-over-year, with mortgage and wealth management businesses positioned for double-digit gains. Management’s guidance remains intact, with pipelines in both areas described as strong.
Key Considerations
FRME’s first quarter execution demonstrates the value of a disciplined, regionally focused commercial banking model. The bank’s ability to manage funding costs, maintain asset quality, and return capital positions it well for ongoing volatility.
Key Considerations:
- Deposit Beta Leverage: Downward repricing flexibility on deposits will help offset asset yield headwinds if rates decline.
- Loan Pipeline Visibility: Commercial and mortgage pipelines remain robust, supporting management’s mid to high single-digit loan growth guidance.
- Tariff Uncertainty: Early signs suggest clients are proactively hedging or passing through tariff-driven costs, but the full impact remains to be seen.
- Capital Flexibility: Strong capital ratios and buyback activity provide options for both defense and offense amid market dislocations.
- Expense Management: Continued focus on efficiency supports margin stability and competitive positioning.
Risks
Tariff-related uncertainty poses a potential risk to both loan demand and credit quality, especially if supply chain disruptions or cost pass-throughs prove more severe than currently anticipated. Asset yields are sensitive to rate cuts, and while deposit cost leverage exists, competitive pressures could limit further reductions. Market volatility could also constrain M&A opportunities and impact non-interest income streams.
Forward Outlook
For Q2 2025, First Merchants projects:
- Stable net interest margin, adjusted for day count effects
- Mid to high single-digit loan growth, supported by strong pipelines
For full-year 2025, management reiterated guidance:
- Mid to high single-digit loan and fee income growth
- Expense growth limited to 1% to 3% over 2024 levels
Management highlighted several factors that will shape results:
- Ability to reprice deposits lower if the Fed cuts rates
- Ongoing monitoring of tariff impacts across the loan book
Takeaways
First Merchants’ Q1 results reinforce its disciplined, core banking approach and capacity to manage through uncertainty.
- Margin and Deposit Advantage: The bank’s downward deposit beta and stable core funding base position it well for a lower rate environment.
- Organic Growth Focus: Commercial lending momentum, especially in C&I, and healthy mortgage pipelines should continue to drive results.
- Tariff Impact Watch: Investors should monitor for any emerging credit or demand headwinds as tariff effects ripple through the regional economy.
Conclusion
First Merchants’ first quarter underscores the value of disciplined deposit management, robust commercial lending, and capital flexibility. While external volatility and tariff uncertainty remain, the bank’s operational execution and strategic clarity offer a resilient foundation for 2025.
Industry Read-Through
FRME’s results offer a template for regional banks navigating rate and macro volatility. Proactive deposit repricing, focused commercial client acquisition, and capital allocation discipline are critical levers as the industry faces potential rate cuts and tariff-driven uncertainty. The ability to sustain loan growth and manage funding costs will differentiate regional players, while credit vigilance and fee income diversification remain essential. Other regional banks should take note of FRME’s emphasis on core relationship management and flexible capital deployment as sector volatility persists.