First Merchants' Handoff Quarter: New CEO Inherits Peak Margin — and a Quietly Raised Definition of 'Normal' Credit

Hardwick's final call delivered $1.09 EPS and a 3.44% net interest margin, but the real news was buried in Q&A: a higher through-cycle loss guide, a $2M-plus expense base reset, and a stock still ~10% below its July high at 1x book.

FRME · Earnings Call · 2026-10-22

A farewell that was really a baseline reset

Mark Hardwick spent 29 years at First Merchants and closed his last earnings call with a 13.58% total risk-based capital ratio and an 11.22% CET1 — a bank handing over the keys in good order. The headline numbers were strong: $1.09 diluted EPS, up 11% year over year and nearly 30% against the third quarter of 2024; adjusted pre-tax pre-provision earnings of $83.7 million, up 19%; a 1.30% return on assets and 15.09% return on tangible common equity. Net interest income reached $159 million on a fully taxable equivalent basis, up 20% over the past year, and — the number management most wanted heard — net interest income has grown 20% over the past year. Michele Kawiecki's margin disclosure carried the quarter: 3.44%, up 6 basis points linked quarter and 20 basis points year over year, the highest in more than two years. Loan yields rose 12 basis points to 6.23% while new and renewed production came on at 6.34%, and the bond portfolio continues to run off at a 2.11% yield into loans. That is the mechanical version of a story about a balance sheet finally outrunning the rate shock of 2022-23 — tangible book value per share of $28.86 fell $0.94 linked quarter not because of operating performance but because of AOCI. And yet the stock is flat-to-down: ret=-1.0% over the last 90 trading days, ~9.7% off the July 16 peak of $45.23. At roughly 1.0x price-to-book, the market is not paying for the margin story. It is discounting something else.

The rate-cycle tape is the whole board

It is worth noting how completely this quarter's macro lexicon belongs to banks. The market's own top-75 curated keywords for 20264 read like a rate-cycle dictionary: Fed rate hike at the top, alongside NPA ratio, retail deposits, brokered deposit declines, deposit beta assumptions and loan beta modeling. First Merchants is squarely inside that wave rather than ahead of it — its own keyword board for the quarter puts rate hike high and pairs it with sub debt, the $100 million issuance completed in late September that added 60 basis points to risk-based capital. That sub debt is the reason margin guidance decelerates even as the Fed tightens. Kawiecki was explicit: “I would expect our Q4 margin to be stable... this fourth quarter will be the first quarter that we will be absorbing a full quarter of interest expense from the sub debt, so that will offset a little bit of that increase.” — Michele Kawiecki, Chief Financial Officer (CFO) · 2026-10-22 A quarter ago she had told the same analyst the bank expected "margin to increase maybe a couple basis points in the back half of the year." The asset-sensitivity math hasn't changed — 1 to 2 basis points of margin per 25-basis-point hike, with $350 million of fixed-rate loans at 4.90% repricing over the next twelve months — but the funding cost from the new debt now sits on top of it. Read carefully, that is a deliberate trade: pay for capital today, buy back stock with it tomorrow.

Credit: where "normal" moved

This was the most important exchange on the call, and it took four questions to surface. The quarter's reported credit numbers look ugly and were engineered to be boring: roughly $29 million of charge-offs on the wireless retailer and roofing contractor that management flagged last quarter, plus two newly-designated nonaccruals — an $18.4 million auto parts distributor and a $4.3 million digital marketing firm — that had already been specifically reserved. Hence provision expense of just $3.3 million against $29.4 million of net charge-offs. The keyword the quarter introduced for this is precise: loss content. The point was that the new nonaccruals carried no new loss content, so a horrific-looking charge-off line produced a nearly invisible provision. That whipsaw — $33 million booked in 2026Q2, $3.3 million now — is a legitimate accounting story. But underneath it, John Martin quietly raised the through-cycle bar:

I had been kind of pre-the last quarter saying it was between 15 and 20 basis points. I would say probably on a more normalized basis, we are probably in the 20 to 25-basis-point range. Would be a normal. Kind of a more normalized charge off run rate.
John J. Martin, Chief Credit Officer · 2026-10-22

Compare that to January, when he said “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.” — John Martin, Executive · 2026-01-27 A 5-basis-point lift in the structural loss assumption is small in dollars and large in signal, especially with criticized and classified balances up modestly and higher rates still biting parts of the investment real estate book. The full-year guide, to management's credit, went the other way — to 38-40 basis points from 40-45 — but that is timing; the normalized rate is the durable input.

What stopped being said

The most interesting absence is the First Savings verticals. For three straight quarters — 20262 and 20263 especially — the transcript was thick with triple net lease, SBA business, first-lien HELOCs, specialty production levels. This quarter they appear once, as a parenthetical about where gain-on-sale income comes from. The acquisition is integrated; the story has moved on. Same with classified loans, a top-five keyword in 20263 that barely registers now — Martin's answer on migration was that there is "nothing there that I am concerned with at the moment," which is exactly what you want to hear and exactly why it stopped being a topic.

The expense line and the buyback

On the July call Kawiecki said “our total expense run rate would be between $111 million to $114 million per quarter, and I still think that is good guidance.” — Michele Kawiecki, Chief Financial Officer · 2026-07-23 Third-quarter noninterest expense came in at $116.3 million, and the new guidance is to use it as the Q4 run rate, with 3-5% growth on top for 2027: “this quarter was more elevated than we had guided, and really, it kind of came from a strategic decision we made to invest more in marketing and branding.” — Michele Kawiecki, Chief Financial Officer (CFO) · 2026-10-22 That is a guide-up dressed as a guide-maintain, and it is the single most credible explanation for a stock that has not participated in the bank rally. The offset is opportunistic hiring out of the Fifth Third-Comerica integration in Michigan, where Mike Stewart says “individuals are becoming available, so we are actively looking at where we could add bankers that would immediately add value.” — Michael J. Stewart, Chief Executive Officer (CEO) · 2026-10-22 Capital return is the counterweight. First Merchants repurchased $12 million of stock in the quarter and $50.3 million year to date, and Kawiecki made the sequencing plain: the sub debt funds the buyback, and “you will see an elevated level of share buyback in Q4 maybe potentially in Q1 as well.” — Michele Kawiecki, Chief Financial Officer (CFO) · 2026-10-22 With repurchases running well above the 2024 pace and the shares at book, the arithmetic is not subtle.

The setup for Stewart

Mike Stewart takes over with an earnings power base his predecessor spent a decade building — 8.5% ten-year EPS CAGR, 13.3% dividend growth — and a strategic plan already a year in the making to decide "how we want to resource our teams." The visible risks are not existential: a consumer mortgage pipeline that Stewart conceded is "definitely showing softness" at 7% mortgage rates, a credit-loss definition that just got 5 basis points harsher, and an expense base that reset $2-5 million higher. The visible asset is a margin that is still asset-sensitive and a deposit franchise that grew 4.2% annualized. At 1x book, the market has priced the first list and ignored the second.