First Merchants Corp: Form 10-Q for the period ended Mar 31, 2026

DILUTED TANGIBLE NET INCOME PER COMMON SHARE, RETURN ON AVERAGE TANGIBLE ASSETS AND RETURN ON AVERAGE TANGIBLE COMMON STOCKHOLDERS' EQUITY (NON-GAAP)

(Dollars in Thousands, Except Per Share Amounts)

Return on average tangible common stockholders' equity is tangible net income (annualized) expressed as a percentage of average tangible common stockholders' equity. Return on average tangible assets is tangible net income (annualized) expressed as a percentage of average tangible assets.

(Dollars in Thousands)

46

NET INTEREST INCOME

Net interest income is the most significant component of our earnings, comprising 96.3 percent of total revenue for the three months ended March 31, 2026. Net interest income and net interest margin are influenced by the volume and mix of earning assets and funding sources, as well as prevailing interest rate conditions. Other factors include accretion income on purchased loans, prepayment activity and the composition and maturity of earning assets and interest-bearing liabilities. Loans typically generate more interest income than investment securities with similar maturities. Funding from customer deposits generally costs less than wholesale funding sources. Factors such as general economic activity, the Federal Reserve's monetary policy, and price volatility of competing alternative investments, can also exert significant influence on our ability to optimize the mix of assets and funding and the net interest income and net interest margin.

Net interest income is the excess of interest received from earning assets over interest paid on interest-bearing liabilities. For analytical purposes, net interest income is also presented on an FTE basis in the tables that follow to reflect what our tax-exempt assets would need to yield in order to achieve the same after-tax yield as a taxable asset. The federal statutory rate of 21 percent was used for 2026 and 2025. Management believes presenting net interest income and net interest margin on an FTE basis is a standard industry practice and provides meaningful comparability to peers by normalizing the impact of tax‑exempt income. For reconciliations of GAAP net interest margin to the corresponding non-GAAP measures provided below, refer to the "NON-GAAP FINANCIAL MEASURES" section of this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Average Balance Sheet

Three months ended March 31, 2026 and 2025

Total average earning assets increased $1.9 billion, or 11.1 percent, to $18.8 billion for the three months ended March 31, 2026, compared to the same period in 2025. This increase was primarily driven by a $2.1 billion, or 15.9 percent, increase in average total loans, reflecting the impact of loans acquired from First Savings on February 1, 2026, which totaled approximately $1.8 billion at acquisition. Average commercial loans, HELOC and installment loans and real estate mortgage loans increased $1.5 billion, $295.0 million and $177.7 million, respectively. These increases were partially offset by a $108.7 million decline in average investment securities and an $81.9 million decline in interest-bearing deposits.

Total average deposits increased $1.7 billion year-over-year. Total average interest-bearing deposits increased $1.4 billion, driven primarily by higher money market and time deposit balances, reflecting the impact of $1.5 billion of interest-bearing deposits acquired from First Savings as well as changes in customer deposit mix following the acquisition. Average noninterest‑bearing deposits increased $257.1 million, reflecting approximately $190.8 million of noninterest‑bearing deposits acquired from First Savings on February 1, 2026, as well as changes to the Corporation’s deposit product offerings, under which certain accounts that previously earned interest were intentionally transitioned to noninterest‑bearing products. Average borrowings increased $145.3 million, primarily driven by higher FHLB advances associated with the First Savings acquisition, partially offset by lower repurchase agreement balances.

Interest Income/Expense and Average Yields

Three months ended March 31, 2026 and 2025

Net interest income on an FTE basis increased $21.3 million, or 15.6 percent, to $157.7 million for the three months ended March 31, 2026, compared to $136.4 million for the three months ended March 31, 2025. Net interest margin on an FTE basis increased 13 basis points to 3.35 percent from 3.22 percent in the prior year quarter. This improvement was driven primarily by a 15 basis point decline in the cost of interest-bearing liabilities to 2.59 percent from 2.74 percent, reflecting lower average deposit costs and favorable changes in funding mix, while yields on average earning assets remained relatively stable at 5.41 percent compared to 5.39 percent in the prior year period. The Corporation recognized $2.8 million of fair value accretion income from purchased loans during the quarter, which contributed approximately six basis points to net interest margin during the three months ended March 31, 2026. This compares to $1.1 million, or three basis points, in the same period of 2025.

Interest income on an FTE basis increased $26.3 million compared to the same period in the prior year, driven primarily by a $1.9 billion increase in average earning assets, which reflected the contribution of loans acquired from First Savings and growth in average loan balances across commercial, real estate mortgage, and HELOC and installment portfolios. Average total loans increased $2.1 billion, or 15.9 percent, year‑over‑year, more than offsetting lower average balances in cash and investment securities. Additionally, the Corporation recorded a $1.2 million interest recovery during the first quarter of 2026 related to the resolution of a previously nonaccrual multifamily commercial real estate loan, which favorably impacted interest income for the period.

Interest expense on deposits increased $3.5 million compared to the prior year period, reflecting a $1.4 billion increase in average interest‑bearing deposit balances, partially offset by lower deposit pricing across most deposit categories. The total cost of interest‑bearing liabilities declined 15 basis points to 2.59 percent for the three months ended March 31, 2026, from 2.74 percent for the three months ended March 31, 2025. Lower average rates on core deposit products, including interest‑bearing demand, money market, and savings deposits, reduced interest expense and favorably impacted margin, while higher average borrowings and modestly higher wholesale funding costs partially offset these benefits. Overall, the reduction in funding costs more than offset relatively stable asset yields and resulted in a 17 basis point improvement in the FTE net interest spread to 2.82 percent from 2.65 percent in the prior year quarter.

The following table presents the Corporation’s average balance sheet, interest income/interest expense, and the average rate as a percent of average earning assets/liabilities for the three months ended March 31, 2026 and 2025.

(Dollars in Thousands)

48

NONINTEREST INCOME

Noninterest income totaled $5.8 million for the three months ended March 31, 2026, a decrease of $24.2 million, or 80.6 percent, compared to the same period in 2025. The decrease was driven primarily by a $29.8 million net loss recognized on mortgage loans reclassified to held for sale during the quarter. This decline was partially offset by higher customer‑related fees, which increased $4.7 million to $31.7 million for the three months ended March 31, 2026 compared to the same period in 2025. The increase in customer‑related fees was driven primarily by higher fiduciary and wealth management fees, increased service charges on deposit accounts, higher card payment fees, and higher net gains and fees on sales of loans.

NONINTEREST EXPENSE

Noninterest expense totaled $125.1 million for the three months ended March 31, 2026, a $32.2 million, or 34.7 percent, increase from the first quarter of 2025. Integration and transaction-related expenses totaling $17.0 million were incurred during the quarter, including $5.2 million attributed to salaries and benefits, $3.0 million of acquisition-related professional and advisory services, and $8.4 million of contract termination and similar charges. Salaries and employee benefits expense, excluding integration and transaction-related expenses, increased by $9.3 million, primarily due to higher salaries and incentive costs during the three months ended March 31, 2026, compared to the same period in 2025. Other expense increased $1.5 million primarily due to a one-time charge for the write-down of a held-for-sale building. Additionally, outside data processing fees and net occupancy increased $1.3 million and $1.1 million, respectively, during the three months ended March 31, 2026, compared to the same period in 2025.

INCOME TAXES

Income tax benefit for the three months ended March 31, 2026 was $1.1 million on pre-tax income of $27.1 million. For the same period in 2025, income tax expense was $7.9 million on pre-tax income of $63.2 million. The effective income tax rates for the first quarter of 2026 and 2025 were (3.9)% and 12.5 percent, respectively.

The lower effective income tax rate for the three months ended March 31, 2026 when compared to the same period in 2025 was primarily due to a higher proportion of non-taxable income relative to total income before income taxes. The lower income before income taxes during the first quarter of 2026 was driven by integration and transaction‑related expenses resulting from the First Savings acquisition, and the net loss on mortgage loans reclassified to held for sale.

The detailed reconciliation of federal statutory to actual tax expense is shown in NOTE 12. INCOME TAXES of the Notes to Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q.

CAPITAL

Preferred Stock

As part of the Level One acquisition, the Corporation issued 10,000 shares of newly created 7.5 percent non-cumulative perpetual preferred stock, with a liquidation preference of $2,500 per share, in exchange for the outstanding Level One Series B preferred stock, and as part of that exchange, each outstanding Level One depository share representing a 1/100th interest in a share of the Level One preferred stock was converted into a depository share of the Corporation representing a 1/100th interest in a share of its newly issued preferred stock. The Corporation had $25.0 million of outstanding preferred stock at March 31, 2026 and December 31, 2025. During the three months ended March 31, 2026 and 2025, the Corporation declared and paid dividends of $46.88 per share (equivalent to $0.4688 per depository share) equal to $0.5 million. The Series A preferred stock qualifies as tier 1 capital for purposes of the regulatory capital calculations.

Stock Repurchase Program

On January 27, 2021, the Board of Directors of the Corporation approved a stock repurchase program of up to 3,333,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100.0 million. On a share basis, the amount of common stock subject to the repurchase program represented approximately 6 percent of the Corporation's outstanding shares at the time the program became effective. The Corporation did not repurchase any shares of its common stock pursuant to the repurchase program during the three months ended March 31, 2025. The stock repurchase program approved in 2021 was discontinued as of March 18, 2025.

On March 18, 2025, the Board of Directors of the Corporation approved a stock repurchase program of up to 2,927,000 shares of the Corporation's outstanding common stock; provided, however, that the total aggregate investment in shares repurchased under the program may not exceed $100.0 million. On a share basis, the amount of common stock subject to the repurchase program represented approximately 5 percent of the Corporation's outstanding shares at the time the program became effective. During the three months ended March 31, 2026, the Corporation repurchased 0.6 million shares of its common stock under the program, for total consideration of $24.9 million. The average purchase price was $38.90 per share. As of March 31, 2026, approximately 1.1 million shares remained available for repurchase under the program, with an aggregate remaining authorization of $28.2 million.

In August 2022, the Inflation Reduction Act of 2022 (the "IRA") was enacted. Among other things, the IRA imposes a new 1 percent excise tax on the fair market value of stock repurchased after December 31, 2022 by publicly traded U.S. corporations (like the Corporation). With certain exceptions, the value of stock repurchased is determined net of stock issued in the year, including shares issued pursuant to compensatory arrangements. During the three months ended March 31, 2026 and 2025, the Corporation recorded excise tax of $0.2 million and $0.1 million, respectively, related to its share repurchases during the period, which is reflected in the Statement of Stockholders' Equity as a component of additional paid-in capital.

Regulatory Capital

Capital adequacy is an important indicator of financial stability and performance. The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies and are assigned to a capital category. The assigned capital category is largely determined by four ratios that are calculated according to the regulations: total risk-based capital, tier 1 risk-based capital, common equity tier 1 ("CET1"), and tier 1 leverage ratios. The ratios are intended to measure capital relative to assets and credit risk associated with those assets and off-balance sheet exposures of the entity. The capital category assigned to an entity can also be affected by qualitative judgments made by regulatory agencies about the risk inherent in the entity's activities that are not part of the calculated ratios.

There are five capital categories defined in the regulations, ranging from well capitalized to critically undercapitalized. Classification of a bank in any of the undercapitalized categories can result in actions by regulators that could have a material effect on a bank's operations. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total risk-based capital, tier 1 capital, and CET1 capital, in each case, to risk-weighted assets, and of tier 1 capital to average assets, or leverage ratio, all of which are calculated as defined in the regulations. Banks with lower capital levels are deemed to be undercapitalized, significantly undercapitalized or critically undercapitalized, depending on their actual levels. The appropriate federal regulatory agency may also downgrade a bank to the next lower capital category upon a determination that the bank is in an unsafe or unsound practice. Banks are required to monitor closely their capital levels and to notify their appropriate regulatory agency of any basis for a change in capital category.

Under the fully phased-in Basel III capital rules, the Corporation and the Bank maintain the minimum capital and leverage ratios, including a 2.5 percent capital conservation buffer, as illustrated in the table below. In order to avoid limitations on capital distributions, including dividends, the Corporation must maintain capital levels above these minimum requirements. The Corporation and Bank have elected to opt-out of including accumulated other comprehensive income in regulatory capital. As of March 31, 2026, the Bank met all capital adequacy requirements to be considered well capitalized under the fully phased-in Basel III capital rules. There is no threshold for well capitalized status for bank holding companies.

The Corporation's and Bank's actual and required capital ratios as of March 31, 2026 and December 31, 2025 were as follows:

50

On November 1, 2013, the Corporation completed the private issuance and sale to four institutional investors of an aggregate of $70.0 million of debt comprised of (a) 5.00 percent Fixed-to-Floating Rate Senior Notes due 2028 in the aggregate principal amount of $5.0 million and (b) 6.75 percent Fixed-to-Floating Rate Subordinated Notes due October 30, 2028 in the aggregate principal amount of $65.0 million. The Corporation exercised its right to redeem $65.0 million of the Subordinated Debt on the scheduled interest payment date during the first half of 2024 and the Corporation exercised its right to redeem the $5.0 million of the Senior Debt on the scheduled interest payment date of July 30, 2025.

On April 1, 2022, the Corporation assumed $30.0 million of subordinated notes in conjunction with its acquisition of Level One. On February 14, 2025, the Corporation, through its trustee, distributed notice of redemption of all $30.0 million in principal amount of its 4.75 percent Fixed-to-Floating Subordinated Notes due December 18, 2029. The Corporation exercised its right to redeem $30 million of the subordinated debt on the scheduled interest payment date of March 18, 2025.

On February 1, 2026, the Corporation assumed $29.0 million of subordinated notes in conjunction with its acquisition of First Savings.

Management believes the disclosed capital ratios are meaningful measurements for evaluating the safety and soundness of the Corporation. Traditionally, the banking regulators have assessed bank and bank holding company capital adequacy based on both the amount and the composition of capital, the calculation of which is prescribed in federal banking regulations. The Federal Reserve focuses its assessment of capital adequacy on a component of tier 1 capital known as CET1. Because the Federal Reserve has long indicated that voting common stockholders' equity (essentially tier 1 risk-based capital less preferred stock and non-controlling interest in subsidiaries) generally should be the dominant element in tier 1 risk-based capital, this focus on CET1 is consistent with existing capital adequacy categories. Tier I regulatory capital consists primarily of total common stockholders’ equity and subordinated debentures issued to business trusts categorized as qualifying borrowings, less non-qualifying intangible assets and unrealized net securities gains or losses.

A reconciliation of regulatory measures are detailed in the following table as of the dates indicated.

(Dollars in Thousands)

(1) Includes net unrealized gains or losses on available for sale securities and amounts resulting from the application of the applicable accounting guidance for defined benefit and other postretirement plans.

In management's view, certain non-GAAP financial measures, when taken together with the corresponding GAAP financial measures and ratios, provide meaningful supplemental information regarding our performance. We believe investors benefit from referring to these non-GAAP financial measures and ratios in assessing our operating results, related trends, and when forecasting future periods. However, these non-GAAP financial measures should be considered in addition to, and not a substitute for or preferable to, financial measures and ratios presented in accordance with GAAP.

The Corporation's tangible common equity measures are capital adequacy metrics that are meaningful to the Corporation, as well as analysts and investors, in assessing the Corporation's use of equity and in facilitating period-to-period and company-to-company comparisons. Tangible common equity to tangible assets ratio was 9.00 percent at March 31, 2026, and 9.38 percent at December 31, 2025.

Non-GAAP financial measures such as tangible common equity to tangible assets, tangible earnings per share, return on average tangible assets and return on average tangible equity are important measures of the strength of the Corporation's capital and ability to generate earnings on tangible common equity invested by our shareholders. These non-GAAP measures provide useful supplemental information and may assist investors in analyzing the Corporation’s financial position without regard to the effects of intangible assets and preferred stock, but retain the effect of accumulated other comprehensive losses in shareholder's equity. Disclosure of these measures also allows analysts and banking regulators to assess our capital adequacy on these same bases.

The tables within the “NON-GAAP FINANCIAL MEASURES” section of this Management’s Discussion and Analysis of Financial Condition and

Results of Operations reconcile traditional GAAP measures to these non-GAAP financial measures at March 31, 2026 and December 31, 2025.

LOAN QUALITY AND PROVISION FOR CREDIT LOSSES ON LOANS

The Corporation’s primary lending focus is small business and middle market commercial, commercial real estate, public finance and residential real estate, which results in portfolio diversification. Commercial loans are individually underwritten and judgmentally risk rated. They are periodically monitored and prompt corrective actions are taken on deteriorating loans. Consumer loans are typically underwritten with statistical decision-making tools and are managed throughout their life cycle on a portfolio basis.

Loan Maturities

The following tables present the maturity distribution of our loan portfolio, excluding loans held for sale, by collateral classification at March 31, 2026 according to contractual maturities of (1) one year or less, (2) after one year but within five years and (3) after five years.

The tables also present the portion of loans by loan classification that have fixed interest rates or variable interest rates that fluctuate over the life of the loans in accordance with changes in an interest rate index.

(Dollars in Thousands)

(Dollars in Thousands)

52

The information required under this item is included as part of Management’s Discussion and Analysis of Financial Condition and Results of Operations, under the headings “LIQUIDITY” and “INTEREST SENSITIVITY AND DISCLOSURE ABOUT MARKET RISK”.

At the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There have been no changes in the Corporation’s internal control over financial reporting identified in connection with the evaluation discussed above that occurred during the Corporation’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

There have been no material changes to the risk factors previously disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2025.