Key Highlights

● First Merchants Corporation issued $100 million of 6.750% fixed-to-floating rate subordinated notes due October 1, 2036.

● The notes pay a fixed rate until 2031, then float at Three-Month Term SOFR plus 202 basis points.

● First Merchants may optionally redeem the notes starting October 1, 2031 at par plus accrued interest.

● A special Redemption right applies if a Tax Event or loss of Tier 2 Capital treatment occurs before maturity.

First Merchants Corporation (NASDAQ:FRME), an Indiana-based bank holding company, entered into an indenture with U.S. Bank Trust Company, National Association, as trustee, to issue $100 million of 6.750% fixed-to-floating rate subordinated notes due October 1, 2036, the company disclosed in an 8-K. The notes pay a fixed 6.750% rate for the first several years before converting to a floating benchmark-based rate.

How The Rate Structure Works

For the fixed-rate period, interest is paid semi-annually on April 1 and October 1 of each year, beginning April 1, 2027. Starting October 1, 2031 and continuing through maturity, the notes convert to a floating rate equal to a benchmark rate, expected to be Three-Month Term SOFR, reset quarterly, plus 202 basis points, with interest then paid quarterly on January 1, April 1, July 1 and October 1, commencing January 1, 2032.

Redemption Terms

First Merchants may optionally redeem the notes, in whole or in part, starting October 1, 2031, at 100% of principal plus accrued and unpaid interest. Separately, the company may redeem the notes in whole, but not in part, at any time before Maturity if certain special events occur: a change in tax treatment (a Tax Event), the loss of Tier 2 regulatory capital treatment for the notes, or a requirement that the company register as an Investment company. Any such special redemption would also occur at 100% of principal plus accrued interest.

Why Bank Holding Companies Issue Subordinated Notes

Subordinated Debt of this kind is a standard capital-raising tool for U.S. bank holding companies, because notes structured to qualify as Tier 2 capital under bank regulatory capital rules count toward a bank's regulatory capital ratios even though they are debt rather than equity. The redemption trigger tied to "loss of Tier 2 capital treatment" in the filing reflects that regulatory purpose directly, if regulators were to stop counting the notes as Tier 2 capital, First Merchants would have the option to redeem them early rather than continue carrying debt that no longer serves its intended capital function.

What The Filing Does Not Say

The 8-K does not disclose the size of the Underwriting discount, the identity of the underwriters, or First Merchants' intended use of the $100 million in proceeds. It also does not state the notes' Credit rating or compare the new issuance to any prior subordinated debt the company has outstanding.

First Merchants As A Regional Bank Holding Company

First Merchants Corporation is the parent Holding Company of First Merchants Bank, a Midwest-focused commercial bank. Bank holding companies like First Merchants periodically tap the subordinated debt markets both to fund general corporate growth and to manage regulatory capital ratios monitored by the Federal Reserve and other banking regulators. Because subordinated debt sits below senior debt and deposits in a bank's Capital Structure but above common and preferred equity, it gives regulators additional loss-absorbing capacity ahead of Equity holders in a stress scenario, which is precisely why qualifying as Tier 2 capital matters enough to the company to be written into the notes' special redemption terms.

Key Dates Across The Notes' Life

The fixed-rate period runs through October 1, 2031, when the notes begin floating at Three-Month Term SOFR plus 202 basis points. First Merchants' earliest optional redemption date is October 1, 2031, coinciding with the shift to a floating rate. A special redemption right exists at any time before maturity if a Tax Event, loss of Tier 2 treatment, or investment-company registration requirement arises. The notes mature October 1, 2036 absent early redemption.