KBRA Assigns Ratings to First Merchants Corporation

KBRA assigns a senior unsecured debt rating of BBB+, a subordinated debt rating of BBB, and a short-term debt rating of K2 to Muncie, Indiana-based First Merchants Corporation (“FRME” or “the company”). In addition, KBRA assigns deposit and senior unsecured debt ratings of A-, a subordinated debt rating of BBB+, and short-term deposit and debt ratings of K2 to its main subsidiary, First Merchants Bank (“the bank”). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

FRME's ratings and Outlook reflect the company's consistently favorable operating performance, driven by its reasonably diversified earnings profile and loan portfolio, good expense management, healthy core capital ratios, and historically solid credit performance. The ratings further reflect the bank's strong leadership team that has set a clear, credible strategy which it has executed over time.

KBRA views FRME's consistent profitability over the years favorably, with ROA averaging a respectable ~1.3% over the past 10 years versus ~1.1% at KBRA-rated banks, which has been achieved across the evolution of the franchise. The company has historically produced resilient earnings across various interest rate and economic backdrops despite possessing a below-peer NIM. However, a diversified revenue base, expense efficiency, and manageable credit costs provide meaningful offsets. While reported results in 1H26 were affected by merger costs, a balance sheet repositioning and a higher than usual credit provision (discussed below) underlying performance remained solid, with core ROA of 1.0%+.

The ratings are also supported by the company's favorable credit performance. Apart from somewhat elevated NCOs and NPAs in 2Q24 (two C&I credits of which one was a club deal) and 2Q26 (two credits of which one was a SNC), respectively, asset quality has generally been in-line with, or slightly better, than rated peers. This reflects FRME's disciplined underwriting, stable core footprint, and diversified portfolio. Management views recent credit migration as borrower-specific rather than systemic, while potential credit losses are well covered by a 1.6% reserve ratio. Below-peer investor CRE at ~180% of total risk-based capital (vs. ~240% at peers), and manageable loss experience also underpin FRME's good credit quality. Moreover, recent enhancements to underwriting, such as a subsequent review of the broader SNC portfolio following 2Q26's NPA activity with greater focus on cash flow/enterprise-value reliance versus tangible asset coverage, reinforce what we view as an already sound credit risk function.

FRME's capital profile remains appropriate for the ratings. At 2Q26, the company reported TCE and CET1 ratios of 9.0% and 11.2%, respectively, which are slightly below rated peers. However, partially offsetting this capital positioning is FRME’s ability to internally generate capital due to its solid earnings and typically gradual balance sheet growth during periods without M&A. While KBRA expects near-term capital metrics to remain at or near current levels, convergence with peers at ~12% CET1 would be viewed favorably.

Finally, the ratings are also underpinned by FRME’s long-tenured management team. Management has successfully grown the franchise organically, while utilizing disciplined M&A to augment the company’s balance sheet and fee generation capabilities, areas it identifies in its strategic planning process. Since 2014, management has acquired and successfully integrated eight banks across Indiana, Michigan, and Ohio. The recently completed merger with First Savings Financial Group, Inc. ("FSFG") in February 2026 added $1.8 billion loans and $1.7 billion deposits, expanded the footprint into southern Indiana, and provides solid revenue opportunities in national specialty lending verticals which we expect to be integrated into the bank's credit risk management framework and managed appropriately.

Rating Sensitivities

Over the near-term, an upgrade is not expected, though continued solid credit quality, stronger capital ratios, and an improvement in earnings, including lower funding costs, could support positive momentum over time. While a downgrade is unlikely, any material degradation in the credit or liquidity profile, or a more aggressive stance with capital management could pressure the ratings.

To access ratings and relevant documents, click here.

Methodology