FRME Q1 Deep Dive: Loan Growth and Deposit Costs Shape Mixed Market Response

Regional banking company First Merchants (NASDAQ: FRME) reported Q1 CY2025 results beating Wall Street’s revenue expectations, with sales up 8.3% year on year to $166.5 million. Its non-GAAP profit of $0.94 per share was 2.9% above analysts’ consensus estimates.

Is now the time to buy FRME? Find out in our full research report (it’s free).

StockStory’s Take

First Merchants began 2025 with notable year-over-year loan growth and tighter expense management, but faced a negative market reaction following its first quarter results. Management pointed to strong commercial loan origination, particularly in the commercial and industrial (C&I) segment, as well as expanding mortgage activity as key drivers. However, CFO Michele Kawiecki acknowledged that noninterest income was seasonally lower, and the cost of deposits remained a focus for the organization. CEO Mark Hardwick recognized the frustration with recent share price volatility, stating, "the volatility in the market has clearly had an impact on our share price. While it's frustrating, it's not something that we can directly control."

Looking ahead, First Merchants is maintaining its guidance for mid to high single-digit loan growth, supported by a robust pipeline and disciplined deposit cost management. Management emphasized monitoring the impact of tariffs on credit demand and asset quality, while also planning to deploy capital from securities roll-offs into loan growth rather than reinvesting in securities. Kawiecki reiterated, "we expect margin to remain relatively stable," provided deposit pricing discipline and favorable loan growth trends hold. The team remains cautious about ongoing economic uncertainty and the indirect effects of tariffs on its client base.

Key Insights from Management’s Remarks

Management attributed loan growth to the commercial and industrial segment, while highlighting ongoing deposit cost reduction efforts and stable asset quality in a volatile market environment.

• Commercial loan growth: The commercial and industrial (C&I) segment led loan growth, with increased revolver usage linked to clients managing working capital and inventory needs, which management suggested may reflect early tariff impacts.
• Deposit cost management: The company continued to lower the cost of deposits, especially within higher-cost public funds and consumer maturity deposits, through active pricing discipline and product mix adjustments.
• Mortgage banking momentum: Mortgage volume and dollar volume both grew notably year-over-year, with management anticipating continued strength in the mortgage pipeline for upcoming quarters.
• Expense control initiatives: Non-interest expenses declined due to the early retirement program and ongoing efficiency efforts, leading to a lower efficiency ratio and supporting profitability.
• Stable asset quality: Asset quality metrics remained steady, with minimal net charge-offs and a well-reserved loan portfolio. The company highlighted that classified loans have stabilized and that non-performing assets remain low, even as ongoing tariff impacts are assessed.

Drivers of Future Performance

Management expects loan growth and margin stability to be influenced by deposit cost trends, tariff impacts, and expense discipline.

• Loan growth outlook: The company is sticking to its mid to high single-digit loan growth guidance, supported by a strong loan pipeline and continued commercial banking momentum. Management indicated that M&A and capital expenditure pipelines remain active across core markets.
• Tariff and economic uncertainty: Management is closely monitoring the effects of new tariffs and broader economic volatility, acknowledging it is too early to assess the full impact on borrowers. The team is conducting regular portfolio reviews and direct client engagement to identify emerging risks.
• Deposit and margin management: The strategy calls for maintaining pricing discipline on deposits to offset potential margin compression from lower rates. Management views the ability to reduce deposit costs as a lever to support net interest margin, even if the Federal Reserve cuts rates later in the year.

Catalysts in Upcoming Quarters

In the quarters ahead, our team will be monitoring (1) the sustainability of commercial loan growth and the health of the loan pipeline, (2) management’s success in controlling deposit costs and upholding net interest margin in a changing rate environment, and (3) the evolving impact of tariffs and economic volatility on credit quality. Execution on expense discipline and any shifts in capital allocation, including share repurchases or selective M&A, will also be important to track.

First Merchants currently trades at $36.86, in line with $36.86 just before the earnings. In the wake of this quarter, is it a buy or sell? See for yourself in our full research report (it’s free).

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