FRME - NASDAQ

Thank you for standing by, and welcome to the First Merchants Corporation Fourth 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 conditions of First Merchants Corporation and involves 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 and will be -- as well as reconciliation of GAAP and non-GAAP measures. As a reminder, today's call is being recorded. I would now like to hand the conference over to your speaker today, Mr. Mark Hardwick, CEO. Mr. Hardwick, you may begin.

Good morning, and welcome to First Merchants' Fourth Quarter 2025 Earnings Call. Thanks for the introduction and for covering the forward-looking statements. We released our earnings yesterday after the market closed, you can access today's slides by following the link on the third page of our earnings release. Joining me today are President, Mike Stewart; Chief Credit Officer, John Martin; and Chief Financial Officer, Michele Kawiecki. On Slide 4, you'll see our 111 banking centers across Indiana, Ohio and Michigan, along with several recent awards recognizing our culture and performance. We ended the year with record total assets of $19 billion, record total loans of $13.8 billion and record total deposits of $15.3 billion. On Slides 5 and 6, our strong balance sheet and earnings performance reflect the quality of the First Merchants team, our customer base and our community-oriented business model. For the full year, we delivered record net income of $224.1 million and record diluted earnings per share of $3.88, an increase of 13.8% from the previous year. Fourth quarter net income totaled $56.6 million or $0.99 per share. Annual return on assets was 1.21% and annual return on tangible common equity was 14.08%. Loan growth remained robust with $197 million of linked quarter growth or 5.8% annualized and nearly $1 billion or $939 million of growth for the year, representing 7.3%. Our efficiency ratio was 54.5% for the year, and we achieved significant operating leverage with revenues growing almost 5x faster than expenses. We have now received all regulatory and shareholder approval to proceed with the acquisition of First Savings Group, which adds approximately $2.4 billion of assets and expands our presence into Southern Indiana and the Louisville MSA. We remain confident in our strategic and financial benefits of the merger, and we will actually close this weekend on February 1, 2026. Now Mike Stewart will cover some of our line of business metrics.

Thank you, Mark, and good morning to all. The business strategy summarized on Slide 7 has been updated to reflect the collective work of our lines of business leadership teams. Each of these business units refined and updated their strategy in alignment with our primary focus of building on our Midwestern strength, growing organically through deeper relationships and smarter use of technology for enhanced client relationship and internal efficiencies. 2025 was a year of momentum and record results. This slide summarizes how our teams have been winning and capturing market share. We remain a commercially focused organization across all these business segments with an eye on growing within the markets pictured on the next slide. So let's go 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. $153 million in commercial loan growth for the quarter or 6% annualized, $852 million of increased commercial loan balances year-to-date, nearly 7% growth rate for all 2025. CapEx financing, increased usage of revolvers, M&A financing and new business conversion are the drivers of this growth. Another encouraging bullet point on this page is the quarter ending pipeline, which is stable from prior quarter and gives me optimism that we will be able to maintain our loan growth into the first quarter. The Consumer segment also shared in balance sheet growth with the residential mortgage, HELOC and private banking relationships driving the $44 million of loan growth for the quarter and the $87 million for all 2025. Pipelines in this segment also consistent from our end of quarter prior. So we can turn to Slide 9 and talk about deposits. The fourth quarter was our strongest quarter of deposit growth with the consumer segment driving increases in new households and balances. Enhanced digital platforms are deepening our client relationships. Our marketing efforts are leveraging the strength of our local brand and the reputation that we have and driving new relationships. The bottom section of this page summarizes the fourth quarter growth of $155 million of total consumer deposit increases with over $250 million in non-maturity balance growth. The full year's results also reflect the growth in the mix of non-maturity and maturity balances assisting in the margin improvement Michele will review next. Commercial business segment is summarized on the top of the page. While deposits have increased in both the quarter and year-to-date, the primary driver has come through our public fund depository relationships. It is a higher cost of deposit, but they are local government and public relationships that utilize many other treasury services we offer. Part of the increase in loan balances come from higher line of credit utilization, which typically reduces operating deposit account balances. 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 pleased with the active engagement our teams are having with their clients as we've continued our pricing discipline, specifically with maturity deposits and public funds and remain hyper focused on relationships and converting single product users. Before turning the call over to Michele, one last comment regarding First Savings Bank. As Mark said, our integration efforts are on track. The engagement of their team has been strong. We have completed our product and process mapping. So post legal close, we will begin the on-site training and preparation for the May integration. Their community bank model and specialty verticals have a solid reputation and continuing their growth within Southern Indiana in these verticals will be our priority. So I'm going to turn the call over to Michele now, and she can review in more detail the drivers of our balance sheet and income statement. Michele?

Thanks, Mike, and good morning, everyone. Slide 10 covers our fourth quarter performance, which reflects a continuation of positive financial trends we had throughout 2025. Total revenues in Q4 were strong with meaningful growth in both net interest income of $5.4 million and noninterest income of $0.6 million. This resulted in overall pretax pre-provision earnings of $72.4 million, up $1.9 million from prior quarter. Strong earnings drove a 4% increase in tangible book value per share on a linked-quarter basis. Turning to annual results on Slide 11. We delivered record diluted EPS and achieved an all-time high tangible book value per share in 2025. Year-over-year positive trends include double-digit net income growth of 12.2% and positive operating leverage. Tangible book value per share ended the year at $30.18, which is an increase of $3.40 or 12.7% from prior year. Slide 12 shows details of our investment portfolio. On the bottom right, you will see the valuation of the portfolio improved meaningfully during the quarter due to changes in interest rates. The unrealized loss on the available-for-sale portfolio declined $30 million or 15%. Expected cash flows from scheduled principal and interest payments and bond maturities over the next 12 months totaled $282 million with a roll-off yield of approximately 2.09%. 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 declined by 8 basis points from the prior quarter to 6.32% due to the impact of recent Fed rate cuts. This quarter, new and renewed loans were originated with a yield of 6.51%, which remains a tailwind for the overall portfolio yield. The allowance for credit losses is shown on Slide 14. This quarter, we had net charge-offs of $6 million and recorded a $7.2 million provision. The reserve at quarter end was $195.6 million and the coverage ratio of 1.42% remained robust. In addition to the ACL, we have $13.4 million of remaining fair value marks on acquired loans, providing additional coverage for potential losses. Slide 15 shows details of our deposit portfolio. The rate paid on deposits declined meaningfully by 12 basis points to 2.32% this quarter. Our team strategically reduced deposit rates following the Fed's rate cuts, resulting in a $3 million reduction in interest expense even as deposits grew $424.9 million or 11.4% annualized in the fourth quarter. On Slide 16, net interest income on a fully tax equivalent basis of $145.3 million increased $5.4 million linked quarter and was up $5.1 million from the same period in prior year. Net interest income was positively impacted by a $3.3 million recovery from a successful resolution of a nonaccrual loan. Our quarterly net interest margin of 3.29% increased 5 basis points from prior quarter. Our teams continue to stay focused on growing loans and deposits using disciplined pricing and our net interest income growth trend throughout 2025 is evidence of their success. Next, Slide 17 shows the details of noninterest income, which totaled $33.1 million with customer-related fees of $30 million. Customer-related fees were strong in all categories with notable quarter-over-quarter growth in wealth management fees of approximately $300,000, card payment fees of $300,000 and gains on sales of mortgage loans of $400,000. Moving to Slide 18. Noninterest expense for the quarter totaled $99.5 million, an increase of $3 million or 3% linked quarter. Expenses for the quarter included $500,000 of acquisition costs, which were offset by a reduction of the FDIC special assessment accrual of $700,000. Full year noninterest expense increased only $3.2 million or less than 1%, demonstrating significant operating leverage. Slide 19 shows our capital ratios. The tangible common equity ratio benefited from strong earnings and AOCI recapture, increasing 20 basis points to 9.38% while returning capital to shareholders through share repurchases and dividends. During the quarter, we repurchased 272,000 of shares for $10.4 million, bringing total share repurchases in 2025 to just over 1.2 million shares for $46.9 million. We remain well capitalized with a common equity Tier 1 ratio at 11.7% and are well positioned to support continued balance sheet growth. That concludes my remarks, and I will now turn it over to Chief Credit Officer, John Martin, to discuss asset quality.

Thanks, Michele, and good morning. My remarks begin on Slide 20. We had strong loan growth for both the year and the quarter of 7.3% and 5.8%, respectively, led by C&I loans shown on line 4, which grew nearly $700 million for the year. While we experienced strong C&I loan demand, we saw more moderate growth in investment real estate for the year and quarter on Line 7 as higher rates slow demand and assets moved into the permanent financing market. The diversity of lending types our teams continue to originate has allowed us to grow as demand varies across various asset classes. On Slide 21 and Slide 22, we again provided more detail of the loan portfolio. On Slide 21, the C&I classification includes sponsor finance as well as owner-occupied CRE. Current line utilization leveled off during the quarter, declining slightly from 50% to 49.8% after climbing in the first half of 2025. In the sponsor finance portfolio, we track key credit metrics across 90 platform companies. We took a $4.4 million charge in the quarter to an individual borrower. We underwrite to higher origination standards compared to traditional C&I loans and track the portfolio quarterly. The portfolio almost exclusively consists of single bank credits for private equity-backed platform companies as opposed to large, widely syndicated leveraged loans from money center banks trading desks. On Slide 22, we break out the investment or nonowner-occupied commercial real estate portfolio. Our office loans are detailed on the bottom half of the slide, represent only 1.9% of total loans and any potential issues are easily managed. The wheel chart on the bottom right details the office portfolio maturities, loans maturing in less than a year represent 28.1% of the portfolio or roughly $73 million. On Slide 23, I highlight this quarter's asset quality trends and position. Asset quality remains strong. NPAs and 90-day past due loans on line 4 were up $5.6 million or 2.54%. The largest nonaccrual, a $12.9 million investment real estate multifamily construction project paid off without loss of principal shortly after quarter end. Adjusting for this payoff, NPAs and 90-day past due loans would have fallen to 0.45%, down year-over-year from 0.66%. Turning to the asset quality migration roll forward on Slide 24 in column 4Q '25, there were new nonaccruals of $22.8 million on Line 2, the largest of which was a $9.6 million investment real estate multifamily construction project. We had a $9.1 million reduction on Line 3 from payoffs or changes in accrual status primarily related to a nursing facility that had been one of the prior quarter's largest nonaccruals that paid off. During dropping down to Line 5, there were $7.3 million in gross charge-offs, the largest of which was the $4.4 million sponsor finance C&I borrower I mentioned earlier. Then dropping down to Lines 12 and 13, we ended the quarter up $5.6 million, excluding the early quarter payoff with NPAs and 90-day past due loans totaling $74.5 million. To summarize, asset quality remains stable and improving. Classified loan balances are largely unchanged at 2.56% of loans with 18 basis points of annualized net charge-offs. We continue to grow C&I loans with our commercially oriented teams. And finally, we are excited about the local opportunities and new business verticals First Savings Bank brings as we head into 2026. I appreciate your attention, and I'll turn the call back over to Mark Hardwick.

Thanks, John. Slides 25 and 26 have been updated, along with our 10-year combined aggregate growth rates. As we look forward to '26, we're committed to supporting our world-class teammates and serving the needs of our clients, which will deliver the high-quality results our shareholders have come to expect. We appreciate your interest and your investment in First Merchants. And at this point, we're happy to take questions. Thank you.

[Operator Instructions] Our first question is going to come from the line of Brendan Nosal with Hovde Group.

Maybe just starting off here on the topic of kind of balance sheet optimization. If I recall correctly, last quarter, I think you said you were looking at how you could optimize the sheet short of a wholesale kind of raise restructure transaction. So can you just update us on what areas of the balance sheet you're looking at, what you would try to achieve with those actions and what the parameters are around the existing capital base?

Yes. Thanks, Brendan. We are -- our line dropped right before the call started. And so for some reason, we dropped again, just give us a little time to dial back in. But we're continuing to evaluate the possibility of some type of balance sheet kind of repositioning. But I would say, as there's been some decrease in rates, the likely size of anything just continues to decline. which validates our decision -- and our communication in the last call that there would be no need to raise any type of capital. So whatever we do, it's going to be pretty modest. What we have already settled on is that we do plan to sell the entire First Savings bond portfolio. It's about $250 million at close. And anything else that we do is really just focused on trying to take pressure off of liquidity. So we're evaluating a small portion of our bond portfolio and some of our lowest yielding bonds as well as some of our lowest yielding loans. But whatever it is, it will be relatively small if we do anything beyond the First Savings bond book.

Our next question will come from the line of Daniel Tamayo with Raymond James.

Yes, maybe starting on the loan growth side. It sounds like pipelines are pretty consistent from where they were last quarter. Loan growth was certainly a solid good story in 2025. Maybe you can give us a sense for your expectations for overall loan growth and where those categories that might be driving that loan growth in 2026 are?

Yes, this is Mike Stewart. I'll try to take that. You're right. The pipelines, yes, it can remain consistent. So -- it's across the board when I think about geography or when I think about our segments, our C&I teams focused on different size companies are all in a good position engaged along the way, our investment real estate team. The new asset-based team that we talked about a couple of quarters ago has been off and running and producing fantastic results. And in this marketplace, that's a really good discipline to have as it rounds out a lot of things we're doing. So when I look at that loan growth, I feel like it's balanced through our segments and how we manage that and through the geographies as well. We might have even referenced about a year ago, we put some additional focus on our small business lending efforts through our consumer network. And that also, while not a large dollar amount, it's just got good momentum across the board. I will say that's part of the strong fourth quarter, we had a couple of payoffs that didn't happen. So it ended our year a little stronger than I would have thought. So the first quarter, though, when I think about outlook, I still feel it's going to be in that mid-single-digit level. Economy is good in the Midwest and our teams, I feel like, we can convert what we're doing.

Okay. So you said mid-single digit for the first year. I apologize if I missed it. Did you think that will carry through for the year as well?

That's the way I'm looking at it, sure, yes.

Yes. I mean we're kind of mid- to high expectations for the year when you think about 6%, 7%, 8% is more how we think about the plan and consistent with what we delivered this year.

And I think about the opportunities that can come our way when we're partnering with First Savings Bank. It's a new part of the state. So we get to work in new areas with their team. And then they've got those verticals that we can continue to evaluate how we want to originate and sell portfolios or continue to utilize our balance sheet. So we've got some nice levers.

Okay. Great. And then maybe one for Michele on the deposits. If you have the CD repricing schedule over the next 12 months with balances and yields?

Yes, I do. And so really in the first 2 quarters of 2026, we have about $800 million of CDs that are maturing. And the weighted average rate on those CDs, it is higher than our current specials. And so first quarter, that weighted average rate is like a 3.75%. Second quarter, it's like a 3.65%. And currently, our 12-month CD that we're offering is at 3.30% and the 9 months is at 3.45%. So we'll get some nice pickup on some savings on interest expense there. In the third quarter, we've got another -- just under $400 million that will be maturing. And those -- that weighted average rate is really in line with our special currently. And so that -- and then there's just really not a whole lot in the fourth quarter. So hopefully, that gives you kind of the color you're looking for.

Yes, that's fantastic. And then one for you, Mark. Just on operating leverage, your thoughts around your ability to achieve that, I guess, probably the easiest way to look at it on an organic basis unless you want to include the deal and what might be problematic or potential issues or benefits to achieving that?

Yes, it's a great question. On our core, we were pretty aggressive with the '26 plan about just continuing to invest in people. We added about 15 FTEs in '25 that were -- that added about $4 million of total expense. And in '26, we committed to another 10 that are part of the sales force, another $2.5 million or so. And you can see some of that coming through in the fourth quarter. And so we're just finding opportunities to add talent that we're really excited about. And I would say if it were just stand-alone, maybe we'd be a little bit more conservative that we're finding the talent that we're adding and just feel like it's consistent with the market opportunity. And so on a core basis, operating leverage was going to be a little less impressive, I guess, than maybe last year, we did a hell of a job, I thought adding operating leverage in '25. But most of it is just because of the strength of the acquisition. We're going to continue to add a real positive kind of operating leverage entity in '26. And on a combined basis, I think we're going to produce the kind of results that you're used to seeing from us. And so we're pretty bullish about the growth of net interest income and fee income and how those numbers exceed any expense additions that we'll have on a net basis when you consider First Merchants, First Savings plus all of our cost takeouts for the year. So we're looking closely at all the estimates that all of you have and feel comfortable with those numbers and feel like those are -- there are EPS targets that we can meet or exceed.

Our next question comes from the line of Damon DelMonte with KBW.

Just had a question on expenses and kind of the outlook there. Michele, could you give us a little guidance of kind of how you're thinking about kind of a core expense base for First Merchants given some of the moving parts in the fourth quarter? And then how we should kind of think about the first partial quarter with FSFG coming on board?

Well, on a core basis, just looking at year-over-year noninterest expense, we have budgeted to increase about -- between 3% to 5% for the reasons Mark just indicated, the addition of talent. And then, of course, we're adding First Savings, their operating expense with we know that closes on February 1. So that will bring on 11 months of operating expense. But just as a reminder, we have 27.5% cost -- annualized cost savings that we've estimated that we think we can fully realize once we get past the integration. And so our integration is scheduled for May. And so I think we'll be able to realize those cost savings more in the back half of 2026.

Yes. And I wanted to just add when I talk about some of the additions of talent, just a reminder that back in '23 when we completed or announced a voluntary early retirement. And at that time, we had about 2,145 employees. And today, we're about 2,035. And so that 5% reduction, we've been able to hold on to even with the addition of talent and on a core basis, expect to add less than 2% to the FTE base and just excited about the quality of talent that we're bringing on to the company.

Got it. Okay. Good color there. And then with respect to the margin, Michele, did you say that there was a benefit of $3.6 million from interest recoveries on nonaccruals?

There was, yes. And when I look at core margin -- go ahead, sorry, Damon.

Oh, no. Yes, I was going to dovetail that into the core margin, so go ahead.

Yes. Just looking at year-over-year, we built one rate cut in our plan that we had built in early in the year. And so on a core margin basis, we did expect that margin in 2026 would compress a few basis points. We do think that we'll be able to get some momentum on repricing deposits, which will help offset some of the asset repricing that occurs because of the commercial nature of our loan portfolio. But on a net interest income basis, we definitely expect to see growth year-over-year.

Our next question comes from the line of Nathan Race with Piper Sandler.

Maybe on fee income, nice growth quarter-over-quarter in 4Q. I'm just curious how you're thinking about the opportunities to grow some of the fee lines in 2026, just given the momentum in fourth quarter and some of the ongoing areas that you guys are trying to grow? I think in the past, Michele, maybe we were talking in mid- to high single-digit range, but just curious if that's still a good expectation versus kind of the 4Q level?

On the noninterest income basis for 2026, I mean, we feel like we can get double-digit growth there. And so we're planning 10% growth. And some of that comes from some of the investment people that we have. We think we'll have some great momentum both in our wealth management space as well as our treasury management. Mike, I don't know if you want to add some color?

Treasury management, some of the investments we're seeing with our derivative product group, that will add what we've done on the consumer side with how we're positioned there, that fee income should continue to be -- that won't be double digit, but that adds to that total. And then by the -- again, when you get past our integration, the fee income, the opportunities that sit with our acquisition, also originate and sell with the mortgage side, originating to sell with some of their products and services or their specialty groups is additive.

Yes, definitely. And just to clarify that double-digit growth expectation for this year, is that inclusive or not including FSFG?

We think we'll have double-digit growth even on a stand-alone basis.

Okay. Great. Good stuff. And then maybe a question for Mike. There's obviously been some notable M&A announcements with some of your larger Midwest competitors recently. So just curious if you're starting to see maybe some M&A-related disruption permeate through the loan pipeline these days? And maybe just any expectations in terms of how some of those competitors maybe more focusing on the South can impact both opportunities to add talent on the commercial side of things and then anywhere else across the company?

Yes, that specifically, we're thinking about -- I'm responding to you in our Michigan market where you got Fifth Third and Comerica and we view it as opportunity. When I think about the pipeline, yes, there's already early conversations happening with clients, with our teams and maybe other outside banks, too, but with our teams that might be a little sensitive to moving from one bank to the new bank or experiences of the past or making sure they've got alternative plans ready to go. So the conversations are happening. So that's a positive. I do feel like there's an opportunity to augment teams. That's probably -- that comes later. I think they've done a nice job of assuring that they've got their arms around individuals and giving them big hubs as they should. But those type of disruptions and the changes that happen in the back end we'll be positioned because we know who that is. We understand the talent that we think would be great to add to our team, and we're already having conversations there as well. Don't know -- from a consumer point of view, don't know yet how we can play into some banking center augmentation and adding to our footprint, but we're evaluating that as well with Michele. So, opportunity, for certain.

Got it. That's really helpful. And then maybe one last one for Mark on buybacks. Obviously, stepped up in the quarter. And I think the valuation is still quite compelling with where you guys trade relative to peers. So just curious if we can expect the pace of buybacks to step up in 2026? Or do you think what we saw in 2025 is a good approximation for this year?

Yes. If we continue to trade kind of below average, I guess -- I mean, it's an opportunity that we'd like to take advantage of, and we have the capital base to do it. So I don't have any desire really to see our TCE grow above the current levels. When we close the transaction, we'll see a decrease from that kind of 9.40% level, more like 8.70%, 8.80%, but still well above our target of 8%. And so we intend to be aggressive with buybacks as long as the price holds where it is. So I'd prefer the price to be up when we didn't take advantage of it, but if this is where we are, it's the right thing to do.

Our next question comes from the line of Brian Martin with Janney Montgomery Scott LLC.

Maybe, Michele, just back to margin for just a minute. The core margin in the quarter ex that onetime item, kind of what was that? And then just remind us of kind of the normal seasonality that you'd expect in 1Q, I guess, as we think about it, I guess, kind of absent FSFG.

Well, core margin for the quarter, the interest recovery did add several basis points to our core margin of probably about 8 basis points. to core margin. And then to your question about what we would expect in Q1, because of the commercial orientation of our loan portfolio, the day count in Q1 always has a pretty significant impact. And I think last year, it ended up being about 5 basis points. And so when you look at the trend of margin, the seasonality definitely takes a dip in Q1 and then obviously rebounds later quarters. But overall, for the year, we would just -- the overall annualized margin, we would expect just a couple of basis points of compression, assuming that we get a Fed rate cut in 2026.

Okay. And just remind us kind of the impact of FSFG on the margin overall?

Yes. Once we pull the deal in, particularly because of the impact of some of the interest accretion, you will see that gives our margin some lift.

Got you. Okay. All right. And then just on the expenses for a moment. Just the kind of the integration occurs in May. Third quarter should be a pretty clean quarter then from an expense standpoint?

Yes, it should be.

Okay. And then just how are you thinking about bigger picture as you get later in the year to Mark's comment or the other comments earlier about operating leverage. Just kind of where the -- the efficiency is at a pretty nice level here at 54-ish. And as you kind of get into the back -- the fourth quarter of the year, can you kind of be around that level? I guess what's kind of the bigger outlook on efficiency as far as where you get to as you start to capitalize on some of the cost savings?

So I think our efficiency ratio will continue to be under that 55% level, and we should have really good operating leverage, I think that it should continue to grow in Q3, Q4 for sure.

Okay. So maybe being -- you're below the 54% or below the current level in fourth quarter of '26. Is that how we should think about it as we kind of hold everything in?

Yes. I mean our goal is always to be below the 55% level, and we'll definitely be below that in each quarter once we get [indiscernible], yes.

Okay. And then just last two for me, was just on the -- you gave the CDs, Michele, but just in terms of the fixed rate loans repricing, I think you said there's still some tailwind just given where repricing is. But what -- can you remind us what's repricing on the loan side in '26?

Yes. We had -- I believe it was $300 -- about $350 million of fixed rate loans that are going to be maturing in 2026, and they were at like a 4.40% rate. And so there's definitely some repricing upside there.

Yes, some tailwind. Okay. And then lastly, just was the tax rate. Still -- I guess, how are you thinking about that? I think it was still around 13% or 13.5%, is that kind of a decent level to think about or...

Yes, good question. On a core basis, we would expect it to be about 13%. I think once you add in the deal and all of the financials on a combined basis for '26, it will probably come in a little bit lower because of the transaction costs and such. And so I would expect it to be more like 12% for 2026 on a combined basis.

Our next question comes from the line of Terry McEvoy with Stephens Inc.

Maybe a question for John. The multifamily construction, it was kind of mentioned the NPL formation and then the payoff. So I guess my question is, what are you seeing across that $400-plus million portfolio? And then as a follow-up, based on your outlook today, is charge-offs kind of $6 million to $7 million like you saw in the third and the fourth quarter? Is that -- are you comfortable with that run rate over the near term?

Yes, so when I think about the multifamily portfolio, it's generally in pretty decent shape. We have had a couple of names that as a result of the higher interest rates and quite frankly, just disagreement amongst partners and the strategy there that have kind of fallen out. The two names that one that went in, one that came out were examples of it. But it's not some wholesale problem. For the most part, we've seen those assets stabilize and to move into the permanent market. When I think about charge-offs, I think about it in that 15 to 20 basis point about depending on what we have in any individual quarter. So yes, that $6 million to $7 million is probably about the right number.

Great. And then maybe a follow-up. Mike, you kind of ran through the positive consumer deposit trends and Michele talked about the success lowering rates. When I look at the decline in commercial deposits ex public funds, is that a good sign for loan demand or commercial loan demand in 2026? Or is that just seasonality and I'm reading too much into it?

Well, there is definitely a correlation with line of credit usage and businesses using their cash to fund and finance. So there could be seasonality in it. That seasonality usually comes more from the public fund side when tax receipts grow and tax payments go out, and you see that in the second and fourth quarters. But when I think about the business flow and the core operating accounts, we penetrate relationships really well. And I do think it's part of the working capital cycle. So when we do see revolver increases, I mean, John had a slide that showed them pretty flat, but my comments also talked about the draws that are happening under construction -- real estate, which also means they're using their cash into projects. So I do think it's a corollary to loan growth with where they're utilizing their excess funds.

We have a follow-up question from the line of Brian Martin with Janney Montgomery Scott.

Just one follow-up, guys, I forgot to ask. The -- and just, Mark, your comments about the outlook for this year, just given the valuation and where the stock is at in the buyback, where does -- how does M&A fit into that? I mean, obviously, it seems like you have your hands full with the transaction and a lot in front of you. But -- and where the valuation is at, does it feel like the buyback is a better use of capital today than considering M&A, and that's probably the way to think about near term, and we'll see where things go? Or how are the dialogue on M&A today?

No, I think you summed it up well. We're focused on the acquisition in front of us. And we do think that using our capital to continue to repurchase shares at the current price level is the best short-term strategy for sure. So we're really not spending much time thinking about what's next on the M&A front.

Got you. Understood. I just wanted to confirm.