Funding pressures ease but commercial credit risks rise
- First Merchants runs one main business: community banking in Indiana, Ohio, and Michigan.
- A recent $271 million mortgage loan sale helped the bank pay down wholesale funding and ease liquidity pressure.
- Net interest margin expanded to 3.38 percent as loan and deposit growth returned to traditional levels.
- Credit quality worsened significantly after two large legacy commercial loans entered nonaccrual status.
- Management raised its 2026 net charge-off guidance to 40 to 45 basis points as total nonaccrual loans hit $118.2 million.
Margin relief meets a rising credit bill
First Merchants recently solved a major funding headache. The bank generated $271 million in liquidity via a mortgage loan sale, using the proceeds to retire higher-cost brokered deposits and wholesale funding. This move helped ease tight loan-to-deposit ratios and allowed the net interest margin to expand to 3.38 percent.
That good news on funding came with a steep cost in credit quality. The bank revealed severe deterioration in its core commercial book. Total nonaccrual loans spiked to $118.2 million, driven primarily by a $28.1 million syndicated credit to an authorized wireless retailer and a $13.7 million sponsor-financed loan to a roofing contractor.
This shift changes the primary watch item for the business. Instead of worrying about whether customers are moving deposits to higher-yielding accounts, investors now have to worry about underwriting standards in large corporate participations. Management has already raised full-year 2026 net charge-off expectations to 40 to 45 basis points.
The bull case relies on the bank maintaining its 3.38 percent margin while keeping organic loan and deposit growth steady near 6 percent. The bear case argues that the wireless retailer and roofing contractor loans are just the beginning, warning of hidden vulnerabilities in the shared national credit portfolio that could trigger higher losses.
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.
Net interest income typically makes up roughly 96 percent of total revenue. That makes interest rates, deposit costs, and credit quality the main drivers of the business. The recent $271 million mortgage sale helped lower funding costs, which protects the core earning engine.
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 early 2026 First Savings deal increased scale by adding $2.4 billion of assets and 16 branches in southern Indiana, building the footprint needed to compete for larger regional business clients.
What customers buy
Commercial loans
Commercial lending is the core earning engine. With recent stress in syndicated credits, commercial underwriting standards are a major focus.
Deposits
The bank offers demand, savings, money market, and time deposits. A better mix of noninterest-bearing deposits has helped stabilize the funding base.
Consumer and mortgage lending
The bank originates home loans and other consumer credit. Management actively manages this portfolio, recently selling $271 million in mortgages to free up liquidity.
Wealth management
First Merchants Private Wealth Advisors offers investment management, private banking, and financial planning services. This brings fee income that is less tied to loan spreads.
Treasury and corporate services
Commercial clients use treasury management, letters of credit, and repurchase agreements. These services deepen relationships and support core operating deposits.
One bank, two revenue streams
First Merchants reports one significant business segment, community banking. The mix shown below uses first quarter 2026 total revenue inside that segment.
What could go wrong
Large commercial credit losses
High impact · High oddsTwo legacy commercial credits, a wireless retailer and a roofing contractor, pushed nonaccrual loans to $118.2 million. If the bank cannot recover the principal on these large loans, earnings and capital will suffer.
Syndicated loan weakness
Medium impact · Medium oddsThe trouble with the $28.1 million wireless retailer loan casts doubt on the underwriting of the broader shared national credit portfolio. More large corporate borrower defaults could force higher loan loss provisions.
Acquired credit losses
Medium impact · Medium oddsThe First Savings deal added $20.5 million of nonaccrual loans earlier in 2026. Management must work these down simultaneously while managing the new legacy commercial issues.
Deposit runoff resuming
High impact · Low oddsWhile funding has stabilized recently, high competitor rates could entice customers to move cash. If organic deposits fall, First Merchants may have to rely on expensive wholesale funding again.
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 are commercial loans a problem right now?
The bank recently saw two large commercial loans default. A syndicated loan to a wireless retailer and a loan to a roofing contractor pushed total nonaccrual loans to $118.2 million.
How is the bank handling its funding pressures?
Management sold $271 million in mortgage loans in mid-2026 to pay down expensive wholesale funding, which helped the net interest margin expand to 3.38 percent.
