First Merchants Corporation

Thank you for standing by and welcome to the First Merchants Corporation first quarter 2026 earnings conference call. Before we begin, management would like to remind you that today's call contains forward-looking statements with respect to the future performance and financial condition of First Merchants Corporation that involves risk and uncertainties. Further information is contained within the press release, which we encourage you to review. Additionally, management may refer to non-GAAP measures, which are intended to supplement but not substitute for the most directly comparable GAAP measures. The press release available on the website contains financial and other quantitative information to be discussed today as well as a reconciliation of GAAP to non-GAAP measures. As a reminder, today's call is being recorded. I'll now turn the conference over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

Good morning, and welcome to First Merchant's first quarter 2026 conference call. Thanks for the introduction and for covering the forward-looking statement on page two. We released our earnings yesterday after markets closed, and today's presentation materials are available via the link on page three of the earnings release. Turning to slide three, you'll see today's presenters and members of our executive management team. Joining me on the call are Mike Stewart, our president, John Martin, our Chief Credit Officer, and Michelle Kaviaski, our Chief Financial Officer. Slide four highlights our footprint and financial scale. We now operate 127 banking centers, reflecting the addition of Southern Indiana following the first savings acquisition. Total assets stand at $21.1 billion, with $15.3 billion in loans and $16.5 billion in deposits. Adjusted performance metrics remain strong, including an adjusted ROA of 1.25% and an adjusted return on tangible common equity exceeding 14%, reflecting the underlying strength of our earnings engine. Turning to slide five, first quarter reported net income was $27.7 million, or 45 cents per diluted share. results included two notable non-core items. First, the legal close of first savings acquisition on February 1st resulted in 17 million of one-time acquisition-related expenses. Second, during the quarter, we strategically repositioned 357 million of mortgage loans from held for investment to held for sale, and we expect to complete the sale of these loans by the end of the second quarter. These loans carry a weighted average coupon of 3.46% and the liquidity provided by their sale will be used to immediately pay down higher cost deposits and over time will be deployed into commercial loans at a 6% plus yield. This repositioning resulted in a $29.8 million mark to market charge in the quarter with a tangible book value earned back of approximately four years. Excluding these items, adjusted earnings per share totaled $1.03 up from $0.94 a year ago, representing 9.6% growth, driven primarily by net interest margin expansion and solid fee income growth. Our tangible common equity ratio remains strong at 9%. Even after completing the acquisition and continuing disciplined share repurchases, including $24.9 million in the first quarter. Now, Mike Stewart will discuss our line of business momentum. Thank you, Mark, and good morning to all. Our business strategy is summarized on slide six. Building our Midwestern strength by growing organically remains our primary objective as a company. Our four primary business units work together in delivering financial solutions for businesses and consumers focused primarily on the maps you see on slide seven. As Mark stated earlier, the first quarter was busy with the closing of First Savings Bank and the preparation for the May integration date. The legal close increased our overall loan portfolio size with organic growth relatively flat during the first quarter. After the strong fourth quarter loan growth, declines in our sponsor and investment real estate portfolio outpaced our CNI growth within our region banking markets. The portfolio declines were normal course payoffs that simply stacked in the quarter. Sponsors selling their portfolio companies that we had financed or real estate projects that achieved secondary market takeouts. I expect growth in both these portfolios to resume in the second quarter. Our regional banking teams, inclusive of the new team in southern Indiana, continue to deliver solid loan growth. It's very pleasing to see our Midwest economies continuing to expand, our clients' businesses continuing to grow, and see our bankers continuing to win new relationships. New loan production during the first quarter for our real estate and our asset-based teams was at record level and demonstrates the value of our diversified loan origination teams. While this quarter's organic growth was flat, I remain confident in our expected mid-single-digit loan growth through the course of 2026. Let's turn to slide eight, deposits. During the first quarter, our core relationship-focused deposit franchise continued to show growth through the commercial, consumer, and our southern Indiana market. The bullet points below the table detail that that total deposit decline came from public funds, consumer CDs, and repayment of first savings broker deposits. Each of these deposit categories is a higher cost source of funds as compared to the primary and operating accounts, which generated increases during the first quarter. Michelle will be reviewing net interest margin improvement during the quarter, which was a direct result of the disciplined deposit and loan pricing. Our continued deployment of new and enhanced products during the quarter Our digital platforms, wrapped with smart and effective marketing, continue to deliver quality growth within our markets. Our people are our strength in meeting the financial needs within our communities. During the quarter, we added new teammates within our sponsor, investment real estate, community banking, and private wealth teams to build on our brand and momentum. Before turning the call over to Michelle, one last comment regarding First Savings Bank. Our integration efforts are on track. The engagement of their team continues to be strong. On-site training and preparation for the May integration are advancing as scheduled. Our model of community banking in southern Indiana has demonstrated its strength. Turnover of frontline personnel has been minimal, and as the prior pages demonstrated via the growth in loans and core deposits, their clients continue to be patient during the transition. The specialty verticals have continued to show consistent production in new business during the quarter. This production will continue to contribute to the fee income of First Merchants as a bulk of the originations are sold. I do want to highlight their SBA business model as a direct enhancement to the rest of First Merchants franchise. Having the ability to offer SBA product solutions to our clients is a natural extension of being a community and commercially focused organization. The new SBA team will be the fulfillment team for all of our existing consumer, small business, and community bank teams. There are early successes that I expect to build post-integration. I'm going to turn the call over now to Michelle to review in more detail the composition of our balance sheet and the drivers on the income statement. Michelle?

Thanks, Mike, and good morning, everyone. Slide 9 covers our first quarter performance. including two months of operating results from first savings following the February 1st closing of the acquisition. There was meaningful growth in total revenues in Q1. Net interest income grew 12.2 million and non-interest income grew 2.5 million linked quarter. This resulted in a 6.3 million increase in overall pre-tax pre-provision earnings of 78.7 million. Tangible book value per share declined 2.8% linked quarter, but increased 7.3% over the same period in prior year. The linked quarter decrease was due to the impact of the acquisition and share buybacks. However, dilution from the first savings acquisition, a close, was less than what we had estimated at announcement. Actual tangible book value dilution decreased was only 2.4% versus 4.8% that we shared at announcement, and the tangible book value earned back is now estimated to be 2.4 years. The difference was primarily driven by a lower interest rate mark, which totaled $53.1 million at closing. Slide 10 shows details of our investment portfolio. The bond portfolio declined from $3.4 billion to $3.3 billion due to changes in valuation and principal payments. First Savings had a $252 million bond portfolio that we sold at closing, creating liquidity for future loan growth. Expecting cash flows from scheduled principal and interest payments and bond maturities through the remainder of 2026 totals $276.7 million. with a roll-off yield of approximately 3.24%. We plan to continue to use future cash flows generated from the BOM portfolio to fund higher yielding loan growth. Slide 11 covers our loan portfolio. The loan portfolio yield declined by 23 basis points from the prior quarter to 6.09%, which was impacted by the lower day count in the first quarter and repricing of assets due to the Fed rate cuts in late 2025. During the quarter, new and renewed loans were originated at an average yield of 6.18%. The allowance for credit losses is shown on slide 12. This quarter, we had net charge-offs of 10.3 million and recorded a 4.9 million provision. The transfer of $357 million of loans to held for sale reduced the loan balances requiring reserve coverage and contributed to a lower provision than the prior quarter. At closing, we also recorded a $22.3 million increase to the allowance related to the credit discount on the first savings loan portfolio. As a result, the allowance for credit losses totaled $212.5 million at the end of the quarter representing a coverage ratio of 1.39%. Slide 13 shows details of our deposit portfolio. The rate paid on deposits declined meaningfully by 23 basis points to 2.09% this quarter. Our team strategically reduced deposit rates following the Fed's rate cuts late last year, resulting in a $4.6 million reduction in deposit interest expense in the first quarter even as deposits grew by $1.2 billion with the addition of first savings. As noted on our slide, our non-interest bearing deposits increased to 23% this quarter, up from 16% last quarter. This was driven by the redesign of our consumer checking account products. This change more accurately reflects the strength and quality of our deposit franchise. On slide 14, Net interest income on a fully tax equivalent basis of $157.7 million increased $12.4 million linked quarter and was up $21.3 million from the same period and prior year. Net interest income was positively impacted by a $1.2 million recovery from the successful resolution of a non-accrual loan. As a reminder, we had a $3.3 million recovery last quarter. Our quarterly net interest margin of 3.35% increased six basis points from prior quarter despite the lower day count in the quarter which reduced margin by five basis points. Our strong core margin reflected our continued pricing discipline. Next on slide 15 shows the details of non-interest income which totaled 5.8 million on a reported basis and $35.6 million on a normalized basis. Customer related fees were strong with quarter over quarter growth in wealth management fees and gains on sales of loans. Moving to slide 16, non-interest expense for the quarter totaled $125.1 million and included $17 million in acquisition related costs. The acquisition costs were primarily incurred in the salaries and benefits and the professional and other outside services categories. First quarter expenses also included 1.1 million of annual benefit plan expense, as well as a one-time charge of $900,000 for the write-down of the building. The cost synergies we expect to gain from the first savings acquisition are on track, and legacy first merchants expenses are in line with the guidance I provided last quarter. Slide 17 shows our capital ratios. The tangible common equity ratio declined to 9% due to the acquisition and share repurchases. Since the beginning of the year, we had repurchased more than 700,000 shares for $27.6 million year-to-date. We remain well capitalized with the common equity Tier 1 ratio at 11.22% and are well positioned to support continued balance sheet growth. That concludes my remarks, and I will now turn it over to our Chief Credit Officer, John Martin, to discuss asset quality.