FRME Regional banks · Community bank · Midwest · M&A · Thesis updated July 2, 2026

Better deposits, tougher credit

First Merchants runs one main business: community banking in Indiana, Ohio, and Michigan.
The First Savings deal added $2.4 billion of assets and 16 southern Indiana banking centers.
Noninterest-bearing deposits rose to 22.7% of deposits, a big improvement from 14.0% at year-end 2025.
Credit quality worsened, with nonaccrual loans rising to $89.6 million after First Savings added $20.5 million.
The loan-to-deposit ratio rose to 92.6%, so funding pressure has not gone away.

01 Running thesis

A cleaner deposit mix, with a credit bill

First Merchants looks better funded than it did last quarter. The First Savings acquisition lifted noninterest-bearing deposits to 22.7% of total deposits from 14.0% at the end of 2025. These are valuable deposits because the bank pays no interest on them, which can help protect profit margins when funding costs are high.

That good news came with a real cost. First Savings also brought $20.5 million of nonaccrual loans, which are loans that are no longer paying as expected. Total nonaccrual loans rose to $89.6 million. That makes the next few quarters a test of whether management bought a stronger deposit base, or a loan book with more losses still hidden inside it.

Liquidity also stayed tight. The loan-to-deposit ratio increased to 92.6% from 90.3%. A high ratio means more of the deposit base is already lent out. If organic deposits keep leaving, the bank may need more wholesale funding, which is usually more expensive than customer deposits.

The bull case is simple: First Merchants uses M&A to build scale in core Midwest markets, keeps the new low-cost deposits, works down the acquired problem loans, and proves that net interest margin can stay firm. The bear case is also clear: credit losses rise, organic deposits keep falling, and the deal fixes one problem while creating another.

May 2026→The First Savings acquisition improved the funding mix, with noninterest-bearing deposits rising to 22.7% of deposits. The offset was weaker credit quality, since acquired nonaccrual loans pushed total nonaccruals to $89.6 million, while the loan-to-deposit ratio rose to 92.6%.

Feb 2026→The 2025 Form 10-K confirmed the First Savings deal and a better headline loan-to-deposit ratio of 90.3%. The concern was that noninterest-bearing deposits had fallen to 14.0% and credit issues were rotating into residential loans.

Oct 2025▼Funding pressure became more visible as the loan-to-deposit ratio rose to 91.6% and noninterest-bearing deposits slipped to 14.1%. Credit issues were lower in total but moved into other loan classes.

Jul 2025▲Credit quality improved as nonaccrual loans fell by $6.4 million, helped by a decline in construction problem loans. The new watch item was an increase in owner-occupied commercial real estate nonaccruals.

May 2025▲The bank collected $22.0 million of principal on a large nonaccrual construction loan after quarter-end. That lowered one major credit concern, even though total nonaccrual loans still rose during the quarter.

Feb 2025▼The 2024 Form 10-K confirmed $42.7 million of charge-offs tied to two commercial and industrial relationships. That shifted the focus toward credit risk management.

Oct 2024→The initial view framed First Merchants as a traditional Midwest community bank with a focused branch strategy. The bank also planned to exit suburban Chicago by selling five Illinois branches.

02 Business model

Classic banking, spread driven

First Merchants makes most of its money the normal bank way. It gathers deposits from households, businesses, and public clients. It then lends that money out through commercial, consumer, farm, public finance, and real estate loans. The spread between loan income and funding cost is called net interest income.

In the first quarter of 2026, net interest income made up 96.3% of total revenue. That makes interest rates, deposit costs, and credit quality the main drivers of the business. A better deposit mix can lift earnings, but bad loans can quickly eat those gains.

The smaller fee business includes trust, wealth management, brokerage, mortgage banking, treasury services, and deposit account charges. These fees help, but they do not change the main story. First Merchants is still mostly a lender funded by deposits.

The First Savings deal increased scale. It added $2.4 billion of assets, $1.8 billion of loans, and $1.7 billion of deposits. Management also sold substantially all of the acquired investment securities portfolio and used the cash to reduce wholesale funding after the acquisition.

03 Product portfolio

What customers buy

Cash cow

Commercial loans

Commercial lending is the core earning engine. Commercial loans made up 76.9% of total loans at March 31, 2026, so business credit quality matters a lot.

Steady

Deposits

The bank offers demand, savings, money market, and time deposits. The key watch point is whether the higher 22.7% noninterest-bearing deposit mix holds after the First Savings integration.

Steady

Consumer and mortgage lending

The bank offers home loans, home equity loans, and other consumer lending products. Mortgage activity can help customer relationships, but loan losses and rate moves can hurt results.

Option

Wealth management

First Merchants Private Wealth Advisors offers investment management, private banking, fiduciary estate, and financial planning services. This brings fee income that is less tied to loan spreads.

Steady

Treasury and corporate services

Commercial clients use treasury management, depository products, letters of credit, and repurchase agreements. These services can deepen relationships and support deposits.

Steady

Branch and digital banking

The bank operates 127 banking locations in Indiana, Ohio, and Michigan, plus electronic and mobile channels. The footprint is more focused after the 2024 exit from suburban Chicago.

04 Business segments

One bank, two revenue streams

Net interest income96%modest

Noninterest income4%declining

First Merchants reports one significant business segment, community banking. The mix shown below uses first quarter 2026 total revenue inside that segment: net interest income was 96.3% and noninterest income was 3.7%.

05 Risk factors

What could go wrong

Acquired credit losses

High impact · Medium odds

First Savings added $20.5 million of nonaccrual loans. Total nonaccrual loans rose to $89.6 million, which reverses the recent improvement in credit quality. If these loans need larger write-downs, earnings and capital could take a hit.

We watchNonaccrual loans, net charge-offs, and management comments on the First Savings workout plan.

Deposit runoff after the deal

High impact · Medium odds

The deal improved the deposit mix, but organic deposits fell by $499.4 million during the quarter. If customers keep moving money out, First Merchants may have to pay more for deposits or use more wholesale funding. That would pressure net interest margin.

We watchQuarterly organic deposit growth, noninterest-bearing deposit share, and deposit costs.

Tight loan funding

Medium impact · High odds

The loan-to-deposit ratio rose to 92.6% from 90.3%. That means loans are growing faster than the deposit base can comfortably support. Future loan growth may depend on pricier funding unless deposits improve.

We watchLoan-to-deposit ratio moving back toward 90% or rising further above 92.6%.

Margin squeeze

Medium impact · Medium odds

Net interest income is 96.3% of total revenue, so the bank is very sensitive to loan yields and funding costs. The better noninterest-bearing deposit mix helps, but higher borrowings and deposit competition can offset that benefit.

We watchNet interest margin, total borrowings, and the cost of interest-bearing deposits.

Integration mistakes

Medium impact · Medium odds

The First Savings deal added branches, loans, deposits, systems work, and credit cleanup. Integration and transaction-related expenses were $16.968 million in the first quarter of 2026. Poor execution could cause customer loss, cost overruns, or credit surprises.

We watchIntegration costs, customer deposit retention, and branch productivity in southern Indiana.

AI and data risk

Low impact · Medium odds

The 2025 Form 10-K added a risk about the use of artificial intelligence. For a bank, mistakes around privacy, security, fair lending, or model use can bring regulatory and legal problems. This is not the main investment risk today, but it is now part of the risk list.

We watchNew regulatory disclosures, cyber events, or legal issues tied to data and AI tools.

06 Quick answers

In one breath

What does First Merchants Corporation do?

First Merchants is a financial holding company that owns First Merchants Bank. It takes deposits, makes loans, and offers wealth, trust, brokerage, mortgage, and treasury services.

Why did the First Savings acquisition matter?

It added $2.4 billion of assets and expanded the bank in southern Indiana. It also lifted the share of noninterest-bearing deposits to 22.7%, but brought $20.5 million of nonaccrual loans.

What is the main risk for FRME now?

Credit quality is the biggest watch item. Nonaccrual loans rose to $89.6 million, and investors need to see whether the acquired First Savings problem loans can be worked down without large losses.

How does FRME make most of its revenue?

Most revenue comes from net interest income, which is the spread between what the bank earns on loans and investments and what it pays for deposits and borrowings. In the first quarter of 2026, net interest income was 96.3% of total revenue.