Thank you for standing by, and welcome to the First Merchants Corporation Third Quarter 2025 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 involve risks 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 will now turn the conference over to Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

Good morning, and welcome to First Merchants Third Quarter 2025 Conference Call. Thanks for the introduction and for covering the forward-looking statement on Page 2. We released our earnings yesterday after the market closed, and you can access today's slides by following the link on the third page of our earnings release. On Page 3 of our slides, you will see today's presenters and our bios, including President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki. Slide 4 has a map with all 111 banking centers, a few awards that we've received recently and some Q3 financial highlights, including a 1.22% return on assets for the 9 months ended September 30, 2025. On Slide 5, our strong balance sheet and earnings performance reflects strength and resilience of our business model. We delivered another 9% loan growth quarter and $0.98 of earnings per share. ROA totaled 1.22%, the same as our year-to-date number I mentioned previously, and the efficiency ratio was 55%, which is consistent with the high performance we strive for. As you all know, we announced the acquisition of First Savings Financial Group on September 25, adding approximately $2.4 billion in assets and expanding our presence into Southern Indiana, which is part of the Louisville MSA. We are confident in our ability and excited about building on their meaningful deposit franchise to create a true community bank in Southern Indiana, much like we've done in previous acquisitions. First Bank in the Northwest part of Indiana and IEB in Fort Wayne are two great examples of acquisitions where we saw potential and successfully built them into high-performing parts of the First Merchants franchise over time. We also believe the verticals will prove beneficial by enhancing fee income through their originate and sell models for SBA loans and first lien HELOCs by adding an additional loan growth and liquidity lever through their triple net leasing business, and we will now have an SBA product offering available throughout our current footprint. You may know that we have completed $8 million of SBA originations so far in 2025, while First Savings has originated over $100 million. Our commercial and small business teams are excited to finally have a more robust offering for our communities. Larry Myers will be joining our Board of Directors upon the close of the acquisition, and Tony Shane will stay on Board to lead their verticals and enhance the financial expertise of our commercial team. We anticipate a mid-first quarter closing, a mid-second quarter integration and are confident in achieving the announced 3-year earn-back. On Slide 6, year-to-date net income totaled $167.5 million, an increase of $31.9 million or 23.5% from the 9 months ended 2024, while earnings per share totaled $2.90, an increase of $0.59 or 25.5% during the same period. Michele will discuss our capital position to include our tangible common equity of 9.18%, which provides meaningful capital flexibility. And John will discuss nonperforming asset data to include our NPA plus 90 days past due to total loans of just 0.51%, down from 0.62% a year ago. Now Mike Stewart will discuss our line of business moment.

Thank you, Mark, and good morning to all. Allow me to share some context for my portion of this call. I'm calling in today from Charleston, South Carolina, where the First Savings Bank, SBL team is gathered. SBL stands for Small Business Lending and represents First Savings Bank's dedicated 45-person team that has a national footprint delivering SBA loans. They gather once a year in person to review their accomplishments and prepare for their upcoming year, and I am pleased to be able to meet this team later this morning as an early bridge to the integration with First Merchants. So back to our earnings call. The business strategy summarized on Slide 7 remains unchanged. We are a commercially focused organization across all these business segments and our primary markets of Indiana, Michigan and Ohio. So turning to Slide 8. As Mark stated earlier, this was another great quarter of loan growth across all segments and across all markets. It is very pleasing to see our Midwest economies continue to expand, our clients' businesses continue to grow and see our bankers continuing to win new relationships. $268 million in commercial loan growth for the quarter, over 10% annualized. $699 million of loan growth year-to-date, over 9% annualized. CapEx financing, increased usage of revolvers, M&A financings and new business conversion are the drivers of this growth. Another encouraging bullet point on this page is the quarter ending pipeline, which is consistent with prior quarter-end and gives me optimism that we will be able to maintain our loan growth and increasing market share activities into the fourth quarter. The Consumer segment also shared in the balance sheet growth with residential mortgage, HELOC and private banking relationships driving the $21 million of loan growth for the quarter. Pipelines for these segments also ended at consistent levels to June. So we can turn to Slide 9, deposits. I will start with the Consumer segment on the bottom page, which was the driver of our deposit growth during the quarter, $96 million in total. The mix is particularly pleasing with the non-maturity categories growing at nearly 5% annualized. Maturity categories also grew by $27 million. The primary driver of the non-maturity balance increase is market share and household growth. Note the last two bullet points on this page. Maturity deposit balances have decreased $198 million year-to-date with non-maturity deposit balances increasing by $178 million. The Commercial Business segment on the top of this page has a similar story. While total deposits declined by $23 million in aggregate, core relationship or operating account balances grew by 4.9% or $56 million. Improving the mix of all deposit categories has been the focus of our teams for the past year and has been accomplished by focusing on primary core accounts and deposit cost. Overall, I'm gratified with the active engagement our teams are having with their clients. We have continued our pricing discipline, specifically maturity deposits and public funds and remain hyper-focused on relationships and converting single product users into a broader bank relationship. So before I turn the call over to Michele, one last comment regarding First Savings Bank. I'm excited to be working directly with them. Larry, his executive team and his Board have been welcoming and supportive of building their market presence in Southern Indiana with First Merchants as a partner. I have already spent time with their teams, visiting banking centers and meeting their clients. They have a strong reputation within Jeffersonville, New Albany and their Southern Indiana footprint. Their community bank model and reputation are well established. Continuing their growth within this community will be our priority as their branch network and commercial capabilities are well positioned. Being able to meet their SBL team and other verticals is also a priority for me as these businesses drive a solid fee-generating revenue stream for the bank. So Michele, I'll let you take it from here.

Thanks, Mike, and good morning, everybody. Slide 10 covers our third quarter performance, which reflects positive trends in all categories. Total revenues in Q3 were strong with meaningful growth in both net interest income of $0.7 million and noninterest income of $1.2 million. This resulted in overall pretax pre-provision earnings of $70.5 million. Tangible book value increased 4% linked quarter and 9% when compared to the same period in the prior year. Slide 11 shows our year-to-date results. The first three lines highlight continued balance sheet growth alongside an improved earning asset mix. Over the past 12 months, we reduced the lower-yielding bond portfolio by $280 million and increased higher-yielding loans by $927 million. Reviewing lines 11 through 14, total revenue increased by 4.5% when comparing year-to-date 2025 with the corresponding period in 2024, while expenses remain unchanged, demonstrating positive operating leverage. Adjusted pretax pre-provision earnings increased by 4.7% and totaled $208.6 million year-to-date 2025. Slide 12 shows details of our investment portfolio. Expected cash flows from scheduled principal and interest payments and bond maturities over the next 12 months totaled $283 million with a roll-off yield of approximately 2.18%. We plan to continue to use this cash flow to fund higher-yielding loan growth in the near term. Slide 13 covers our loan portfolio. The total loan portfolio yield continued to expand, increasing 8 basis points from the prior quarter to 6.4%. This increase was primarily driven by loan originations and refinances during the quarter at an average yield of 6.84%. The allowance for credit losses is shown on Slide 14. This quarter, we had net charge-offs of $5.1 million and recorded a $4.3 million provision. The reserve at quarter end was $194.5 million and the coverage ratio of 1.43% remained robust. In addition to the ACL, we have $14.4 million of remaining fair value marks on acquired loans. When including those marks, our coverage ratio is 1.54%. Slide 15 shows details of our deposit portfolio. The total cost of deposits increased 14 basis points to 2.44% this quarter, reflecting the competitive deposit dynamics in our markets. We expect the rate paid on deposits to decline as a result of the September rate cut and plan to reduce rates more, assuming there are cuts in October and December. On Slide 16, net interest income on a fully tax equivalent basis of $139.9 million increased $0.7 million linked quarter and was up $2.9 million from the same period in the prior year. Our quarterly net interest margin of 3.24% was stable linked quarter and continues to be resilient. Next, Slide 17 shows the details of noninterest income. Noninterest income totaled $32.5 million with customer-related fees of $29.3 million. Customer-related fees were strong in all categories, reflecting continued momentum. Moving to Slide 18. Noninterest expense for the quarter totaled $96.6 million and included $0.9 million of severance and acquisition costs. When excluding those one-time charges, core expenses were $95.7 million and in line with our guidance from last quarter. The core efficiency ratio remains low at 54.56% for the quarter. Slide 19 shows our capital ratios. The tangible common equity ratio benefited from strong earnings and AOCI recapture, increasing 26 basis points to 9.18% while returning capital to shareholders through share repurchases and dividends. During the quarter, we repurchased 162,474 shares totaling $6.5 million, bringing total share repurchases year-to-date to 939,271, totaling $36.5 million. We remain well capitalized with a common equity Tier 1 ratio at 11.34% 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.

Thanks, Michele, and good morning, everyone. I'll begin with an overview of our loan portfolio on Slide 20. In Q3, we saw robust loan growth across the portfolio with a $289 million increase in total balances quarter-over-quarter or 8.7% annualized. C&I lending grew by $169 million this quarter, continuing its strong momentum from last quarter. Commercial real estate added $87 million, reflecting steady demand and disciplined execution. We continue to be well below the CRE regulatory concentration guidance. And with the pending FSB merger, we have ample room for new originations in the portfolio. Our Midwest footprint remains the core of our portfolio with 82% of borrowers located in our 4-state region. Turning to Slide 21. Our sponsor finance portfolio continues to perform well with $911 million in outstandings across 100 companies in diverse industries. The credit metrics in this portfolio remain solid with 85% of the borrowers having a senior leverage under 3x and 63% maintaining a fixed charge coverage ratio above 1.5x. Losses have remained nominal over the life of the portfolio with only $15.1 million in losses over a 10-year history with nearly $2 billion in funded loans. We also continue to manage our shared national credit exposure prudently with $1.1 billion across 94 borrowers, primarily in Wholesale Trade, Agriculture and Manufacturing. Underwriting and credit quality remains strong across consumer and residential mortgage portfolios with over 96% of our $727 million in consumer loans and more than 91% of $1.9 billion in residential mortgage loans originated with credit scores above 669. Turning to Slide 22. Our investment real estate portfolio now stands at roughly $3.1 billion, as shown above, with the more significant concentrations highlighted here on Slide 22. Within non-owner occupied office, we continue to monitor our exposures with the top 10 loans representing 53% of total office exposure with a weighted average LTV of 62.8% at origination. The largest individual office loan is $25 million, secured by a single-tenant mixed-use property at 67.2% loan-to-value. The second largest is a $24.1 million medical office facility. Turning to Slide 23. Asset quality remains solid with nonperforming loans declining 3 basis points from $72 million to $68.9 million. Our nonaccrual loans tend to be small and granular, with the largest being a $12.9 million to a multifamily secured loan. Classified loans finished the quarter lower with improvements across the C&I portfolio. Our net charge-offs for the quarter were 15 basis points of average annualized loans. Performance was strong coming out of the second quarter and resulted in a solid performance for the portfolio in the third quarter. Then turning to Slide 24. Closing out the nonperforming asset roll forward highlights the strong performance just mentioned. We added $15.5 million on Line 3 and various nonaccrual loans. The largest was a $4.3 million contractor. We resolved the $6.8 million brewery relationship from last quarter, which is included in the $9.4 million on Line 3. With $6.5 million in gross charge-offs at Line 5. We added $1.3 million in OREO from the mortgage portfolio and had a $2.5 million decline in 90 days past due. Overall, our credit portfolio continues to perform well as we continue to use consistent underwriting and proactive credit risk management. I appreciate your attention, and I'll now turn the call back over to Mark Hardwick.

Thanks, John. Turning to Slide 25. The compound annual growth rate of tangible book value per share on the bottom left continues to grow at a healthy 7% level post dividends, post buybacks and post acquisitions. When adjusted for the AFS AOCI volatility, which is now at $2.72 the combined annual growth rate is actually 8.5%. And then differential back in 2002 was nearly $4 per share. So we've made up some ground as the portfolio has matured and as rates have changed slightly. Slide 26 represents our total asset CAGR of 11.5% during the last 10 years and highlights how acquisitions have improved our footprint and helped fuel our growth. As we look forward to the last couple of months in 2025, we expect more of the same strong performance. Thank you for your attention and your investment in First Merchants. And at this point, we're happy to take questions.

Our first question comes from Damon DelMonte with KBW.

Just wanted to start off with kind of the expense outlook. I know going into '26, it gets a little confusing because of the merger closing at the beginning part of the year. But just kind of wondering, Michele, your thoughts on kind of core expenses here in the fourth quarter and kind of what you anticipate for core growth as we look through '26?

Yes. Well, I'll start with the fourth quarter. We would expect Q4 to be relatively in line with Q3. And that is, I would say, after you back out those one-time expenses. And so really looking at Q3 core expenses. We always use Q4 to true up with incentive accruals and such, but not expecting any meaningful increase. So we should have a pretty disciplined finish to the year. and we're going through our planning process for '26 right now. And so we'll be more prepared to give guidance, I think, on our next call for 2026.

Got it. Okay. And then with regards to the margin, nice to see it hold up pretty steady quarter-over-quarter. Can you help us think a little bit about the impact if we do have two rate cuts here in the fourth quarter and kind of remind us how the margins kind of position for future cuts?

Yes, assuming we experience rate cuts in October and December, I expect a slight margin compression in Q4. As I've mentioned earlier, our ALCO model indicates that for every 25 basis point cut, our margin decreases by approximately 2 basis points due to the fact that two-thirds of our loan portfolio consists of variable rates, which means that loan yields will decrease. However, we are actively lowering the rates we pay on deposits in response. Looking back at last year, we were quite successful in managing this at that time. We'll need to monitor the deposit dynamics in the market, but we are optimistic about our ability to reduce the impacts of the compression as much as possible.

Okay. And just kind of along those lines, it looks like the deposit costs were up this quarter. Any color on kind of what occurred during the quarter?

Yes. We really had to juice up some of our specials in order to stay competitive. And so I feel like that's the primary driver.

Okay, that's all that I had for now. So...

Damon, I would just add we had such strong loan growth that we needed to make sure that we had the funding on the other side and decided that it was worth being a little more aggressive with specials this quarter.

Our next question comes from Nathan Race with Piper Sandler.

Just going back to the deposit pricing and cost increase in the quarter. Just curious if you're seeing any rationality or improvement from a competitive pricing perspective these days now that we have the Fed cut from last month and likely one or two more in the fourth quarter. And just can you remind us how much in the way of kind of managed or exception rate deposits you guys have that can reprice following those cuts in the future as well?

Yes. With the September rate cut, we've been closely monitoring the market. I wish I could say we see some of our competitors reducing their rates, but it still feels quite high. We're hopeful that with the next cut, we will see some rationality from the competition. We have about $2.5 billion in indexed deposits. However, as Mike Stewart mentioned, our consumer portfolio is more variable than it was at this time last year. This means we will have the capacity to lower pricing on a significant portion of deposits. We already made adjustments with the September rate cut, and we believe we will be able to do more in the next two cuts, provided they happen before the end of the year.

Okay. That's helpful. And then just thinking about the impact from First Savings. I believe you're picking up around a $700 million or $800 million portfolio of kind of lower yielding single-tenant lease finance loans. So just curious how you feel about that asset class. Is that a portfolio you want to grow in the future? Or do you think there's an optionality to maybe sell that book just to reduce kind of the rate accretion that would be associated with marking that portfolio to market upon closing? And just any other thoughts on maybe repositioning part of the legacy First Merchants securities portfolio with the cover of the deal closing in 1Q?

Yes, Nate, good question. I think what I love about the triple net lease portfolio is we have optionality. So if we continue to feel bullish about loan growth in the core bank or in the legacy bank, First Merchants, at a 6.84% kind of yield like we had this quarter. And if there are rate cuts, obviously, that will come down. But the triple net lease portfolio is marked to about 6.25% and it's fixed rate. So it kind of just depends on what our loan growth looks like in the variable rate portfolio and the yield differential. And we know that we have outlets if we wanted to sell a portion of it. And yes, we're always looking at the rest of our balance sheet. We have some mortgage loans that are yielding a little over 4.5% and some public finance loans that are in the same place and then the bond book. And so we're always just trying to look for opportunities to take advantage of shifting that liquidity into a higher-yielding asset.

Got it. And it seemed like a pretty opportunistic addition to add First Savings. But maybe, Mark, just curious if you can touch on future M&A ambitions into next year. Are you seeing more opportunities to maybe consolidate some subscale banks across your footprint? Or are you just going to be more focused on kind of the organic runway that you have in front of yourselves?

Yes, I would say we're busy. I mean when I look at the talent that I have within our organization and just performing organically, and then throwing on top of that, the acquisition that will require time and energy to do it right and the opportunity that exists still in our Detroit MSA as well as now the Louisville MSA. I don't feel like M&A is a priority. We're in a position where we have the one we were looking for and the one we were most interested in. We love our geographies. And at least for now, that's 100% of our focus. And I would just add, the Comerica, Fifth Third announcement is an opportunity for us, and we're actively looking at how we take advantage of that. And so I know every time we have an acquisition, competitors do the same thing in the markets that we're moving into. But we're very aware of the 50-plus commercial bankers in that marketplace. We're very aware of the 24 locations that are within a mile where there's overlap and would love to find a way to turn First Merchants into a more meaningful franchise than it already is in the Detroit MSA as Fifth Third and Comerica come together.

Yes. To my follow-up question on Detroit specifically, and it seems like you're really well positioned there, particularly given that I think a lot of the Level 1 commercial bankers came out of Comerica way back when. So I appreciate all the color.

Yes, it's interesting. I was talking to Pat Ferring, who is the CEO of Level 1, and he said his phone has been ringing off the hook. And so he's been helpful in helping us figure out the best way to approach the disruption. So thank you.

Our next question comes from Daniel Tamayo with Raymond James.

The loan growth was very strong this quarter, especially on the C&I side, where there has been significant momentum over the past few quarters. You mentioned that pipelines are fairly stable. Given that, I'm seeing 14% loan growth year-over-year in the C&I space. Do you think this growth is sustainable for the next few quarters? Is there anything unusual about the strength of the pipelines?

I believe this is just typical activity and there's nothing unusual about it. Businesses in the Midwest, as I mentioned earlier, maintain positive outlooks. They are adjusting to what the tariffs mean and managing that. We have a dedicated group of bankers with solid reputations, and we haven't yet addressed the potential disruption in Michigan that Mark referred to, which may enhance opportunities. Essentially, we are experiencing core commercial and industrial activity that we appreciate. On the investment real estate side, we stay focused, and with lower interest rates and a better understanding of capital stacks and cap rates, developers are advancing projects more swiftly, which aligns well with our underwriting approach. I feel optimistic about the fourth quarter. Typically, at the end of the fourth quarter, there are issues related to taxes or year-end closures, but we aren’t seeing any unusual activity this time. It feels like a normal operating pace. We will see how rate cuts may influence business decisions at the beginning of 2026.

I might add, contributing to what I agree with everything Stewart just said, with the asset-based lending team coming online actually gives even more optionality and momentum to the C&I team.

John, I'm glad you brought that up. That's so true. Absolutely.

Terrific color guys. And I apologize if I missed it, but did you give the impact that paydowns had on the CRE book? You did have significant growth in the non-owner occupied bucket in the quarter and kind of across the industry, we saw pretty sizable paydowns.

Did you say CRE book or...

Yes, our non-owner occupied for the quarter increased by $87 million. The focus, as illustrated in the real estate slide, is primarily on multifamily properties. We are continuously exploring opportunities in this area, and the growth we are experiencing this year is largely influenced by the commitments made, especially on the construction side, from what we booked last year.

Please standby.

Can you guys hear me now?

John, we lost you when you were talking a little bit about last year's production in IRE multifamily and how the construction draws are funding out through this summer. So and then we lost you.

Okay. Thanks for getting in there. And so what we're seeing, obviously, last year yield itself into this year, produces what we're seeing this year. But there's no question that higher rates. I was just ending with what higher rates obviously have reduced the rate at which that portfolio has grown. So I still feel good about it, but it's not 2 years ago, 3 years ago.

Yes, I appreciate the information. I recognize it grew significantly. I was curious about how that growth occurred despite paydowns. That's great to hear. Additionally, I have one more question for John regarding the credit aspect. It was encouraging to see classified loans decrease in the quarter. I'm interested in the future pace of those balances, if you have any insights.

Yes. When I examine classified loans for the quarter, we have been successfully addressing issues, particularly in the commercial real estate sector when interest rates increased. We needed to manage interest reserves, and we've made progress on that over the past year and a half. This will likely lead to potentially higher classifications. We have tackled many of these challenges and resolved some nonperforming loans, which has been beneficial. Looking ahead, I feel like we are currently just shifting dollars within the classified categories while waiting for some improvement. There are a few segments that are somewhat more problematic than others, but at this moment, we are primarily repositioning funds.

Our next question comes from Brian Martin with Janney.

Just maybe, Michele, just maybe one for you or two on the margin. Just can you remind us the fixed rate loan repricing that you kind of got coming up here? And then also, I think just on the securities portfolio, I think someone asked about optimization and/or just runoff in that portfolio to fund loan growth. I guess, how are you thinking about that kind of the legacy First Merchants bond book? Is there more room to use cash flows to redeploy the loans? Or is some optimization possible?

Okay. Well, I'll start with your first question on fixed rate loans. And so in the fourth quarter, we have about $130 million of fixed rate loans that will mature, and those are sitting at about a yield at about 5%. If we look into 2026, we've got about $350 million that have a yield of about 4.50% million that will mature in 2026. And so hopefully, that answers your first question. On the securities portfolio, our plan is to continue to use that roll-off, the cash flow to fund loans on a go-forward basis. And as Mark said, particularly when we close with First Savings, we'll continue to evaluate options to optimize our earning asset mix, looking at their portfolios, our portfolios, et cetera.

Got you. And the roll-off of the securities portfolio, if you don't do anything with the legacy book, Michele, what does that look like in the next 12 months?

We anticipate generating approximately $280 million in cash flow from the bond portfolio over the next year, which includes around $100 million in interest. The remaining amount will come from paydowns and maturities, with a yield of 2.18%.

2.18%, okay. Perfect. And then just on the sensitivity, how does First Savings impact your asset sensitivity, I guess, as you kind of look at once we get the combined company...

It actually reduces our asset sensitivity a bit. So we actually land in a really nice place. We're still going to be a little asset sensitive, but less so than we were on a stand-alone basis.

Got it. You mentioned competition on the deposit side. Are you experiencing similar competition on the loan side regarding new yields, considering the repricing we need to address with fixed rates? What does the current competition in the loan sector look like?

Pumping down a little bit. Go ahead.

If I refer back to Danny's comment regarding loan growth, we are enjoying a strong growth rate and focusing on the yield of everything on our balance sheet. We are prioritizing the highest yielding products while considering credit constraints. It is gratifying to experience this growth and feel like we are succeeding despite market competition. We are being strategic about the loans we are taking on and their yields, which puts us in a favorable position. I prefer being here rather than the alternative.

Yes. Okay. And then the last question, Mark, regarding the opportunity. It appears that there has been strong loan growth, particularly in the commercial and industrial sector. You mentioned a while back that you brought in some significant new hires. Are they contributing to this growth? Additionally, if you're not considering mergers and acquisitions next year, do you see opportunities to bring in more talent to maintain the positive momentum you're experiencing?

Yes. That is the reason that you saw a little uptick in our noninterest expense, and it was in the salaries. It's the talent that we've added to the team. And I would think next year, there's going to be an opportunity, especially in the Detroit marketplace to take advantage of some additional recruiting that just strengthens our franchise.

Our next question comes from Terry McEvoy with Stephens.

Maybe just to start with a question for you, Michele. Were deposit costs at the end of the quarter below that 2.44% average? And what are your thoughts on where that could go in the fourth quarter? I know you talked about a decline, but just to frame some expectations, where do you see that trending in Q4?

Yes. Good question. Yes, we did see them come down a few basis points at the end of the quarter, and that was just because we were anticipating that September rate cut and made some adjustments really quickly that we were able to get pushed in even before the end of the quarter. And so with anticipated rate cuts in October and December, we're going to keep pushing those rates down.

And then just a small question when I look at the First Savings presentation, and I think Mike Stewart was with that group today. The SBA lending, those that are on the balance sheet, are those guaranteed or unguaranteed loans? And then what are your thoughts on managing that business going forward in terms of retaining some of the unguaranteed portion, which has a higher risk profile than the rest of your commercial portfolio, I would assume.

Yes, I do think go ahead, Mark. Sorry, I can't see you.

Yes, we're in different locations. The unguaranteed portion is what is on the balance sheet. And the spread is about 2.75% over prime. And so it's a pretty high-yielding portfolio. And we're really excited about just putting that entire team on top of our current footprint. And Mike, maybe you want to talk about the volume we think we can add just within the First Merchants franchise. And I know that's where you are today.

Yes. One last comment on the team, as I'm learning, self-contained within their SBA group, is a dedicated, I'll call it, workout team, and they've had a really good track record of low losses in that portfolio. They understand the process. They have a really nice documentation and relationship to the SBA flow. So they manage that portfolio, I think, in a very positive manner. And then to Mark's point, what's on the balance sheet is their unguaranteed piece. Getting my arms around and working with the team is they've built a model and built an infrastructure that they feel really comfortable that generates about $150-ish million of SBA volume a year. You heard Mark say they probably did around $110 million or so last year. Their fiscal year is in September. Their earnings release is next week, so you can pick up some of that information. And then juxtapose that to what Mark said earlier, First Merchants originated $8 million of SBA volume, and that's what they do really well. So when you think about Indiana, Michigan and our Ohio footprint and having an outlet, if you want to call it that, or an opportunity for our business banking teams or community banking teams to have a place to send SBA volume. I think it becomes really easy for us to fill in their capacity in a meaningful way and just use it as another wonderful fee opportunity and be more relevant in our local communities. So that's how I feel like the strategic fit is in place.

The SBA program loans have a maximum limit of $5 million, meaning the unguaranteed portion can be up to $1.25 million. If we originate $150 million and retain all of the unguaranteed portion, it would amount to $37.5 million for the year. There's also consideration for runoff, which contributes to a portfolio with some higher risk. This is reflected in the higher ACLs and the purchases, which are expected to yield around 4% or 5%. However, the yields are attractive, with a spread of approximately 2.75% over prime.

Our next question comes from Brendan Nosal with Hovde Group.

Maybe just starting off here on capital. TCE ratio back above 9% for the first time since late 2021. I know that you'll deploy some here with First Savings soon, but ratios remain healthy pro forma even for the deal and you'll be building pretty healthily off that base. Can you just walk us how you think about capital generation and uses of excess capital, particularly considering the near-term lack of interest in additional M&A?

Yes, we will continue to allocate at least one-third of our capital for asset generation. Recently, it has required slightly more than that for dividends. We will keep exploring ways to leverage our current multiples. Looking ahead to next year, we are trading at $1.16 of our adjusted book value after adjusting for AOCI or $1.27 of stated book value. If we achieve earnings of $4 per share, given our current situation, we are trading at 9 times earnings. Therefore, it makes sense to be active in share buybacks. Additionally, we are searching for ways to optimize our balance sheet, as Nate inquired earlier, considering whether it’s wise to utilize some capital to optimize loan categories that are undervalued without a deposit relationship or possibly make some adjustments to our bonds. I reviewed the recent bond restructurings by Horizon Bank and Simmons Bank, and I want to clarify that we are not pursuing anything that would require raising tangible common equity. However, we are open to smaller initiatives that may involve subordinated debt. We are performing well, even with some lower-yielding assets, and are confident in our ability to make gradual improvements.

Okay. Great. Thank you for the definitive answer on a wholesale restructuring there. Maybe turning to asset quality and the reserve. I'm just kind of curious why you're still carrying such a large reserve at 143 of loans like before you even factor in remaining fair value marks. Like credit has been really healthy this year, and you're something like, I don't know, 20 or 30 basis points above your peer group when it comes to ACL coverage.

Yes, it has decreased over the past couple of years. Some of this is due to the methodology used in model building, and our quantitative model results in a higher, more conservative estimate. The positive news is that we experienced strong credit migration this quarter. We prioritize loan growth and determine the necessary provision, and we had strong loan growth this quarter combined with positive credit migration. Additionally, changes in certain macroeconomic variables actually reduced the amount of provision we needed despite the significant loan growth, leading us to a provision of $4.3 million.

And I would just add, that's the perfect GAAP answer, and it's the right answer. I would say if we tried to be more aggressive and put more in earnings, I don't have confidence that we would get paid for it.

Yes. Yes. No, that's totally fair. Better to have more than enough. Final one for me. Just thinking about the progression of NII dollars from here, even if we get the rate cuts that are forecasted, which I think is two this quarter and then maybe two more in 2026, do you think you can continue to grow dollars of NII even as the Fed is cutting rates as expected?

Yes, we do. And I say that because we've got confidence in our ability to manage deposit costs down, as I talked about earlier. And then even just if you look specifically at this quarter, our end-of-period loans are really quite a bit higher than our average for the quarter, average loans for the quarter. And so I think that will produce some good interest income coming into Q4 as well.

Our next question comes from Nathan Race with Piper Sandler.

Just want to clarify on the buyback appetite. It sounds like there's still interest there just given the valuation disconnect that you discussed, Mark. And then I just want to confirm that with FSG pending, you guys aren't precluded from additional share repurchases.

Yes, thanks for the clarification. I don't expect anything to happen between now and the closing. Regarding capital deployment, if we maintain these higher levels and our price remains stable, we would be active.

Okay. But you're not necessarily precluded with the deal announcement pending?

We're not intending to do anything between now and close.

I would now like to turn the call back over to Mark Hardwick for any closing remarks.

Well, thanks, everyone, for the great questions. It was an exciting quarter for us. We're really proud of the performance, the core organic performance of the company. We're excited about our M&A, announced M&A opportunity that we have. And as I mentioned, we're really kind of thrilled with the markets that we're in and the future that it can provide for our company. So just thank you for your investment, and it was a fun call. Thanks. Have a great quarter.

Thank you. This concludes today's conference. Thank you for your participation, and have a great day. You may now disconnect.