First Merchants (FRME) Q4 2025: Loan Growth Hits 7.3%, First Savings Deal Expands Midwest Reach

2026-01-27 | By EarningsIQ Research

First Merchants delivered record loan and deposit growth, with robust commercial lending and disciplined deposit pricing fueling operating leverage. The acquisition of First Savings Group, closing imminently, positions FRME for deeper Midwest expansion and new specialty verticals. Management signals continued share repurchases and mid-to-high single-digit loan growth as 2026 priorities.

Summary

• Commercial Lending Drives Expansion: C&I and real estate lending sustained momentum, supporting asset and earnings records.
• Integration Focus With First Savings: Acquisition brings $2.4B in assets and new specialty banking capabilities.
• Capital Deployment Prioritizes Buybacks: Management views share repurchases as best near-term use of excess capital.

Performance Analysis

First Merchants ended 2025 with record total assets of $19 billion, loans of $13.8 billion, and deposits of $15.3 billion, underscoring the strength of its community bank model, which emphasizes relationship-based commercial and consumer banking. Net income and EPS reached all-time highs, driven by a 7.3% annual loan growth rate and disciplined expense management, resulting in an efficiency ratio of 54.5% for the year. Commercial lending was the standout, with $852 million in new balances for the year, while consumer segments also contributed to balance sheet growth, particularly in residential mortgages and private banking.

Deposit growth accelerated in Q4, with consumer deposits leading the way and the bank leveraging digital platforms and local branding to deepen client relationships. Deposit cost management was notable: the average rate paid on deposits declined by 12 basis points, even as total deposits grew, demonstrating a proactive approach to funding costs amid Fed rate cuts. Non-interest income and operating leverage improved, with fee categories such as wealth management and card payments seeing sequential growth, and full-year non-interest expense rising less than 1% despite investments in talent and technology.

• Commercial Loan Mix Shift: C&I loans led growth, while investment real estate slowed amid higher rates.
• Deposit Cost Reduction: Strategic repricing lowered interest expense even as balances rose.
• Fee Income Momentum: Wealth management and treasury management contributed to double-digit fee growth targets for 2026.

Asset quality remained stable, with net charge-offs at 18 basis points and classified loans unchanged, supporting the bank’s risk-managed growth narrative.

Executive Commentary

Strategic Positioning

1. Commercial Lending as Core Engine

Commercial & Industrial (C&I) lending, loans to businesses for working capital and expansion, remained FRME’s primary growth lever, with nearly $700 million in C&I growth for the year. The bank’s focus on diverse lending types and disciplined underwriting standards—especially in sponsor finance, which are loans to private equity-backed companies—helped sustain volume while managing risk. Commercial real estate growth moderated, reflecting higher rates and a shift to permanent financing, but was offset by robust activity in other business lines.

2. Deposit Strategy and Funding Cost Control

Deposit gathering, the process of attracting customer funds, was fueled by consumer segment momentum and digital engagement. The bank’s ability to reduce deposit costs by 12 basis points, even as balances grew, reflects disciplined pricing and a focus on core accounts. Public fund deposits, deposits from local governments, provided volume but at higher cost, requiring ongoing mix management to support margin stability.

3. Fee Income Diversification

Non-interest income, revenue from sources other than lending, showed sequential improvement, with management targeting double-digit growth in 2026. Wealth management and treasury services, including payment and derivative products, are key contributors, and the First Savings acquisition is expected to bring additional specialty fee opportunities post-integration.

4. Operating Leverage and Talent Investment

Operating leverage, the ability to grow revenue faster than expenses, was a highlight in 2025. While FRME invested in new talent—adding 15 FTEs in 2025 and planning 10 more in 2026—expense growth was contained below 1% for the year. The First Savings deal is expected to deliver 27.5% cost takeout on acquired expenses, with full run-rate savings realized after May’s integration.

5. Capital Allocation and Shareholder Returns

Capital deployment, including share repurchases and dividends, remained a priority. Management repurchased over $46 million of stock in 2025 and indicated buybacks will continue as long as valuation remains attractive. M&A appetite is muted near-term, with focus on integrating First Savings and maximizing organic and acquired growth levers.

Key Considerations

FRME’s 2025 results reflect a well-executed balance between growth, risk management, and capital efficiency, setting a foundation for further expansion through the First Savings acquisition and continued commercial lending strength.

Key Considerations:

• Mid-to-High Single Digit Loan Growth Outlook: Management targets 6-8% loan growth for 2026, supported by a balanced pipeline across geographies and segments.
• Deposit Repricing Tailwinds: $800 million in CDs maturing in H1 2026 will reprice at lower rates, further reducing funding costs.
• First Savings Integration: $2.4 billion asset addition brings new markets and specialty verticals; 27.5% cost synergy target post May integration.
• Buyback Continuity: Share repurchases prioritized over new M&A in the near term, leveraging strong capital ratios.
• Efficiency Ratio Commitment: Management expects to maintain sub-55% efficiency, with further improvement in H2 2026 as integration synergies are realized.

Risks

Margin compression remains a near-term challenge, with management expecting a few basis points of decline in 2026, partially offset by deposit repricing and accretion from the First Savings deal. Commercial real estate exposure, though modest, requires ongoing vigilance amid market volatility. Integration risk from the First Savings acquisition and potential economic shifts in Midwest markets also warrant close monitoring.

Forward Outlook

For Q1 2026, First Merchants expects:

• Mid-single digit loan growth, consistent with Q4 pipelines.
• Deposit cost reductions as CDs reprice at lower rates.

For full-year 2026, management maintained guidance:

• 6-8% total loan growth, double-digit fee income growth, and sub-55% efficiency ratio.

Management emphasized that integration synergies from the First Savings deal will be realized in the back half of 2026, supporting margin and operating leverage, while ongoing buybacks will continue to support EPS growth.

• Loan repricing tailwinds and new market entry are expected to drive incremental growth.
• Expense growth will be contained, with integration cost savings ramping post-May.

Takeaways

First Merchants enters 2026 with momentum in commercial lending, disciplined deposit management, and a clear capital allocation strategy. The First Savings acquisition is a pivotal step, deepening Midwest reach and adding specialty banking capabilities.

• Record Growth Foundation: Commercial lending and deposit growth underpin robust earnings and balance sheet strength.
• Integration Execution Key: Realizing planned cost synergies from First Savings and maintaining asset quality are critical for 2026 performance.
• Watch for Fee Income and Buyback Leverage: Upside depends on sustained fee growth and opportunistic capital return as integration progresses.

Conclusion

FRME’s 2025 performance showcases a resilient, growth-oriented Midwest banking franchise, with commercial lending, disciplined funding, and a strategic acquisition setting the stage for continued value creation. Execution on integration and capital deployment will be the key investor watchpoints in 2026.

Industry Read-Through

FRME’s experience highlights the continued strength of regional commercial lending in the Midwest, even as higher rates temper real estate activity. Deposit repricing discipline and digital engagement are increasingly differentiating community banks in a competitive funding environment. Acquisition-driven expansion with a focus on cost synergies remains a viable path for scale and efficiency, but integration execution is critical. Peer banks should note the importance of maintaining asset quality and operating leverage while pursuing growth through both organic and inorganic means.

FRME Financials Regional Banks Commercial Lending Deposit Management Acquisition Buybacks Efficiency