FRME Q4 Deep Dive: Loan Growth, Deposit Trends, and First Savings Acquisition Shape Outlook

Regional banking company First Merchants (NASDAQ:FRME) announced better-than-expected revenue in Q4 CY2025, but sales fell by 8.3% year on year to $178.4 million. Its non-GAAP profit of $0.98 per share was 3% above analysts’ consensus estimates.

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StockStory’s Take

First Merchants’ fourth quarter performance was driven by continued loan growth, disciplined deposit management, and margin resilience despite an 8.3% year-over-year decline in revenue. Management credited robust expansion in commercial and consumer segments, alongside stable pipelines, for maintaining momentum. CEO Mark Hardwick highlighted, “Loan growth remained robust with $197 million of linked quarter growth,” attributing the results to strong activity in capex financing, revolver utilization, and new business conversions. Expense control and improvements in net interest income also contributed to earnings stability.

Looking ahead, First Merchants’ outlook centers on integrating First Savings Group, capturing cost synergies, and sustaining loan and fee income growth. Management expects operating leverage to remain positive, with CFO Michele Kawiecki stating, “We have 27.5% cost savings that we think we can fully realize once we get past the integration.” The company anticipates mid- to high-single-digit loan growth, margin stability supported by deposit repricing, and double-digit noninterest income growth, while balancing further investments in talent and technology.

Key Insights from Management’s Remarks

Management emphasized that fourth quarter performance was shaped by continued loan and deposit growth, disciplined pricing, and the groundwork for integrating First Savings Group.

• Commercial loan growth momentum: Commercial and industrial (C&I) lending saw sustained expansion, supported by capex financing, higher revolver usage, and M&A financing. Management noted particular strength in new business conversions and highlighted the successful launch of an asset-based lending team, which contributed to a balanced growth profile across geographies and segments.
• Deposit mix and pricing discipline: The consumer segment led deposit growth, driven by new household acquisition and enhanced digital platforms. The bank strategically lowered deposit rates after recent Federal Reserve cuts, resulting in a decline in deposit interest expense even as balances increased. Management focused on deepening client relationships, converting single-product users, and prioritizing core deposits.
• Margin resilience despite rate cuts: Net interest margin improved 5 basis points from the prior quarter, aided by both loan growth and a $3.3 million recovery from a resolved nonaccrual loan. Despite yield pressure from Federal Reserve rate cuts, new and renewed loans continued to price above portfolio averages, creating a modest tailwind for near-term margin.
• Asset quality stability: Nonperforming assets remained low, with net charge-offs largely confined to isolated cases in sponsor finance and multifamily construction. Chief Credit Officer John Martin described the multifamily portfolio as “generally in pretty decent shape,” and management maintained that classified loan balances and charge-off rates were stable.
• First Savings Group acquisition progress: The bank completed regulatory and shareholder approvals for the acquisition of First Savings Group, expected to close imminently. Management sees the deal as expanding its footprint in Southern Indiana and Louisville, with an emphasis on leveraging specialty verticals and realizing planned cost synergies post-integration.

Drivers of Future Performance

Management’s 2026 outlook is anchored by the integration of First Savings Group, ongoing core loan growth, and disciplined cost management to preserve operating leverage.

• Loan growth targets: Management projects mid- to high-single-digit loan growth for the year, anchored by balanced pipelines across commercial, consumer, and asset-based lending. They cited strong Midwest economic conditions and new market opportunities stemming from the First Savings acquisition as key contributors.
• Expense and synergy realization: Operating expenses are budgeted to rise 3%–5% due to investments in sales talent and integration costs. However, management expects to achieve 27.5% annualized cost savings from the First Savings integration, boosting operating leverage in the second half of 2026 as synergies are realized.
• Margin and fee income outlook: Net interest margin is anticipated to experience modest compression due to rate environment headwinds, but deposit repricing and higher-yielding loan origination provide partial offsets. Double-digit noninterest income growth is targeted, supported by momentum in wealth management and treasury services, with incremental contributions from the First Savings portfolio.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace and success of First Savings Group integration and realization of targeted cost synergies, (2) loan growth consistency across commercial and consumer segments, and (3) the effectiveness of deposit repricing strategies amid a shifting rate environment. Progress on noninterest income expansion and asset quality metrics will also be important to track.

First Merchants currently trades at $38.11, in line with $38.01 just before the earnings. At this price, is it a buy or sell? The answer lies in our full research report (it’s free).

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