First Merchants' Q2 2025: Key Contradictions in Loan Growth, Funding Costs, and M&A Strategy

Loan growth expectations, funding cost pressures and loan growth strategy, provision for loan losses, deposit cost management, and M&A environment are the key contradictions discussed in First Merchants Corporation's latest 2025Q2 earnings call.



Strong Financial Performance and Loan Growth:
- First Merchants Corporation reported net income of $56.4 million in Q2 2025, an increase of $17 million or 43% from a year ago, with earnings per share of $0.98.
- The growth was driven by 9.1% annualized loan growth and a significantly lower provision for credit losses due to improved credit quality.

Deposit and Expense Management:
- The bank experienced a $347 million increase in commercial deposits during the quarter, supporting its working capital needs and leading to increased revolver usage.
- Despite increased loan origination expenses, noninterest expenses only rose by $700,000 compared to the previous quarter, maintaining a low efficiency ratio of 53.99%.

Loan Portfolio and Yield Dynamics:
- The total loan portfolio yield rose by 11 basis points to 6.32%, driven by loan originations and refinancings at an average yield of 7.04%.
- This increase was partially offset by a rise in funding costs due to increased deposit competition, leading to modest margin compression expectations in the back half of the year.

Asset Quality and Provisions:
- Net charge-offs were low at 0.07% of average loans annualized, with a reserve coverage ratio of 1.47%.
- The level of provision was driven by improvements in nonperforming loans and changes in macroeconomic forecasts.