FRME Q3 Deep Dive: Loan Growth, Deposit Competition, and M&A Integration in Focus

Regional banking company First Merchants (NASDAQ:FRME) met Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 2.8% year on year to $166.1 million. Its non-GAAP profit of $0.99 per share was 2.9% above analysts’ consensus estimates.

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StockStory’s Take

First Merchants’ third quarter results met Wall Street’s revenue expectations, with management pointing to robust loan growth and a resilient balance sheet as key themes. CEO Mark Hardwick highlighted the 9% annualized loan growth and deposit mix improvements, noting, “We delivered another 9% loan growth quarter… and the efficiency ratio was 55%, which is consistent with the high performance we strive for.” The acquisition of First Savings Financial Group was a prominent topic, as leadership emphasized its potential to enhance fee income and expand in Southern Indiana. Management also cited a disciplined approach to deposit pricing and relationship-building as contributors to performance, even as deposit costs edged up to remain competitive.

Looking ahead, First Merchants’ guidance is shaped by expectations around sustained loan demand, proactive deposit cost management, and the integration of First Savings Financial Group. CFO Michele Kawiecki cautioned, “If there are rate cuts, our ALCO model predicts that for each 25 basis point cut, our margin declines about 2 basis points,” but added confidence in the bank’s ability to manage deposit costs down in response. Leadership underscored the importance of leveraging the expanded SBA lending platform and monitoring the competitive landscape, especially in key markets like Detroit and Louisville. The company is also focused on optimizing its earning asset mix and maintaining disciplined expense control as it enters the next phase of growth.

Key Insights from Management’s Remarks

Management attributed the quarter’s performance to strong loan origination, competitive deposit dynamics, and the closing of a strategic acquisition poised to reshape the bank’s footprint.

• Strong loan growth momentum: Commercial and consumer lending saw robust expansion, with commercial loans up $268 million and consumer balances rising through residential mortgage and HELOC activity. Management credited focused relationship-building and local market strength as drivers.
• Deposit mix improvement: The bank grew consumer deposits by $96 million, emphasizing non-maturity categories, and achieved positive shifts in deposit mix by targeting core accounts and household growth. Pricing discipline was maintained despite competitive pressures.
• First Savings acquisition impact: The announced acquisition is expected to add $2.4 billion in assets and provide new fee income streams, particularly from SBA lending and triple net leasing. Management aims to integrate First Savings’ specialized lending verticals across the expanded footprint.
• Expense management: Operating expenses remained controlled, with only minor increases attributed to talent acquisition. Leadership reaffirmed a focus on maintaining efficiency ratios and disciplined cost control, even as integration activities ramp up.
• Credit quality stability: Asset quality metrics remained solid, with nonperforming loans and classified assets declining. The company’s reserve coverage ratio remained above peer averages, reflecting a conservative credit approach and positive credit migration during the quarter.

Drivers of Future Performance

Management’s outlook emphasizes continued loan growth, disciplined deposit pricing, and the integration of First Savings as key factors shaping future performance.

• Loan growth sustainability: Leadership expects the current pace of commercial and consumer lending to remain steady, citing strong pipelines and Midwest economic resilience. The integration of First Savings’ SBA lending capabilities is positioned to further support volume and fee income.
• Deposit cost and margin pressures: The company anticipates modest margin compression if additional Federal Reserve rate cuts occur, as a significant portion of the loan book is variable rate. However, management is proactively adjusting deposit pricing to limit the impact, with flexibility to reprice a substantial portion of deposits.
• M&A integration and asset optimization: The First Savings deal is expected to diversify revenue streams and provide asset mix optionality, enabling management to redeploy lower-yielding assets and potentially sell fixed-rate portfolios as needed to optimize returns.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will monitor (1) the pace and success of integrating First Savings Financial Group, including the rollout of its SBA lending platform across new markets; (2) trends in deposit costs and the bank’s ability to defend net interest margin amid potential rate cuts; and (3) sustained loan growth and credit quality stability, especially in light of ongoing competitive and macroeconomic pressures. The impact of major competitor consolidation in Michigan and Kentucky will also be key.

First Merchants currently trades at $37.02, up from $36.60 just before the earnings. Is there an opportunity in the stock?See for yourself in our full research report (it’s free for active Edge members).

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