Key Highlights

  • First Merchants Corporation shares rose 0.56% to $40.71 at last closing after closing a $100 million offering of subordinated notes.
  • The 10-year notes carry a 6.750% fixed rate until 2031, after which they convert to a floating rate tied to Term SOFR plus 2.02 percentage points.
  • Proceeds will be used for general corporate purposes, which the company said may include buying back its own shares.
  • The bank reported second-quarter Net Income of $43.5 million, or $0.70 per diluted share, with a common Equity tier 1 ratio of 11.16% at June 30.

First Merchants Corporation (NASDAQ:FRME), the Muncie, Indiana-based bank holding company, rose on the Russell 2000 after closing the sale of $100 million of 6.750% fixed-to-floating rate subordinated notes due October 1, 2036. The company had announced pricing on September 23.

The notes pay interest twice a year starting April 1, 2027, with the rate staying fixed until September 30, 2031, after which it resets quarterly to three-month Term SOFR plus 2.02 percentage points, with a floor of zero. First Merchants can redeem the notes at Face Value on any interest payment date from October 1, 2031 onward, but before that only in special cases such as a tax change, and only with Federal Reserve approval.

Latest Developments

Subordinated notes rank below deposits and senior Debt if a bank fails, making them riskier for investors and typically requiring higher yields, but that junior status is what allows qualifying subordinated debt to count as Tier 2 capital, a layer of loss-absorbing funding under U.S. banking rules. The fixed-to-floating structure with a Call Option after five years is standard for bank subordinated debt, since Tier 2 Credit phases down over the notes' final five years.

The deal adds $100 million of regulatory Capital without issuing new shares, avoiding dilution for existing owners. First Merchants has been an active share repurchaser, buying back 336,145 shares for $13.4 million in the second quarter of 2026 alone, bringing year-to-date Buybacks to $38.3 million, and raising Tier 2 capital can free up room for further repurchases while keeping total capital ratios comfortable.

Financial and Business Position

First Merchants is the Holding Company for First Merchants Bank, operating across Indiana, Ohio and Michigan alongside private Wealth advisory services. At the end of June 2026 it reported $21.3 billion of total assets, $15.5 billion of loans and $16.8 billion of deposits. Second-quarter net income was $43.5 million, or $0.70 per diluted share, compared with $0.98 a year earlier; excluding acquisition-related costs tied to its First Savings Financial Group integration, adjusted Earnings were $0.74 a share.

Capital levels looked solid ahead of this deal, with a common equity tier 1 ratio of 11.16% and a total risk-based capital ratio of 12.98% at June 30. One area of concern was credit quality: the nonperforming Assets ratio rose to 0.56% from 0.43% three months earlier, after two commercial relationships totaling $41.8 million were placed on nonaccrual status, against which the bank held $29.7 million of reserves.

Stock-Market Context

A 6.75% coupon on $100 million means roughly $6.75 million of interest a year before taxes, a manageable cost for a bank of this size. The floating-rate period built into the notes offers bondholders some protection, since if short-term rates are higher in 2031 the coupon rises with them, giving the bank a reason to call the notes.

Capital Raised, Buyback Capacity Unlocked

Investors are watching third-quarter results to see how capital ratios look with the new notes included, any step-up in share buybacks as a sign the proceeds are being deployed that way, whether the two problem commercial relationships are resolved or more loans slip into nonaccrual status, and whether First Merchants redeems the notes at the 2031 call date depending on rates and its capital needs at that time.