First Merchants (FRME)

Regional banking company First Merchants (NASDAQ:FRME) met Wall Street’s revenue expectations in Q3 CY2025, but sales fell by 2.8% year on year to $166.1 million. Its GAAP profit of $0.98 per share was 1.9% above analysts’ consensus estimates.

Company Overview

Dating back to 1893 when it first opened its doors in Indiana, First Merchants (NASDAQ:FRME) is a Midwest regional bank providing commercial, consumer, and wealth management services through branches in Indiana, Ohio, Michigan, and Illinois.

Regional banks, financial institutions operating within specific geographic areas, serve as intermediaries between local depositors and borrowers. They benefit from rising interest rates that improve net interest margins (the difference between loan yields and deposit costs), digital transformation reducing operational expenses, and local economic growth driving loan demand. However, these banks face headwinds from fintech competition, deposit outflows to higher-yielding alternatives, credit deterioration (increasing loan defaults) during economic slowdowns, and regulatory compliance costs. Recent concerns about regional bank stability following high-profile failures and significant commercial real estate exposure present additional challenges.

First Merchants competes with other regional banks operating in the Midwest such as Huntington Bancshares (NASDAQ:HBAN), Fifth Third Bancorp (NASDAQ:FITB), and Old National Bancorp (NASDAQ:ONB), as well as with national banks like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC) that have significant presence in its markets.

In general, banks make money from two primary sources. The first is net interest income, which is interest earned on loans, mortgages, and investments in securities minus interest paid out on deposits. The second source is non-interest income, which can come from bank account, credit card, wealth management, investing banking, and trading fees. Thankfully, First Merchants’s 6.6% annualized revenue growth over the last five years was decent. Its growth was slightly above the average banking company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within financials, a half-decade historical view may miss recent interest rate changes, market returns, and industry trends. First Merchants’s recent performance shows its demand has slowed as its revenue was flat over the last two years. Note: Quarters not shown were determined to be outliers, impacted by outsized investment gains/losses that are not indicative of the recurring fundamentals of the business.

This quarter, First Merchants reported a rather uninspiring 2.8% year-on-year revenue decline to $166.1 million of revenue, in line with Wall Street’s estimates.

Net interest income made up 80.7% of the company’s total revenue during the last five years, meaning First Merchants barely relies on non-interest income to drive its overall growth.

Markets consistently prioritize net interest income growth over fee-based revenue, recognizing its superior quality and recurring nature compared to the more unpredictable non-interest income streams.

The underlying profitability of top-line growth determines the actual bottom-line impact. Banking institutions measure this dynamic using the efficiency ratio, which is calculated by dividing non-interest expenses like personnel, facilities, technology, and marketing by total revenue.

Investors focus on efficiency ratio changes rather than absolute levels, understanding that expense structures vary by revenue mix. Counterintuitively, lower efficiency ratios indicate better performance since they represent lower costs relative to revenue.

Over the last five years, First Merchants’s efficiency ratio has increased by 3.6 percentage points, going from 51.5% to 54.8%. Said differently, the company’s expenses have increased at a faster rate than revenue, which usually raises questions unless the company is in high-growth mode and reinvesting its profits into attractive ventures.

First Merchants’s efficiency ratio came in at 56% this quarter, falling short of analysts’ expectations by 134.6 basis points (100 basis points = 1 percentage point). This result was 2.4 percentage points better than the same quarter last year.

For the next 12 months, Wall Street expects First Merchants to maintain its trailing one-year ratio with a projection of 55.3%.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

First Merchants’s remarkable 7.6% annual EPS growth over the last five years aligns with its revenue performance. This tells us it maintained its per-share profitability as it expanded.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For First Merchants, its two-year annual EPS declines of 2.6% mark a reversal from its (seemingly) healthy five-year trend. We hope First Merchants can return to earnings growth in the future.

In Q3, First Merchants reported EPS of $0.98, up from $0.84 in the same quarter last year. This print beat analysts’ estimates by 1.9%. Over the next 12 months, Wall Street expects First Merchants’s full-year EPS of $4 to shrink by 3.5%.

Banks are balance sheet-driven businesses because they generate earnings primarily through borrowing and lending. They’re also valued based on their balance sheet strength and ability to compound book value (another name for shareholders’ equity) over time.

This is why we consider tangible book value per share (TBVPS) the most important metric to track for banks. TBVPS represents the real, liquid net worth per share of a bank, excluding intangible assets that have debatable value upon liquidation. Other (and more commonly known) per-share metrics like EPS can sometimes be murky due to M&A or accounting rules allowing for loan losses to be spread out.

First Merchants’s TBVPS grew at a mediocre 4.5% annual clip over the last five years. However, TBVPS growth has accelerated recently, growing by 14.1% annually over the last two years from $22.33 to $29.08 per share.

Over the next 12 months, Consensus estimates call for First Merchants’s TBVPS to grow by 2.5% to $29.81, paltry growth rate.

Leverage is core to a financial firm’s business model (loans funded by deposits). To ensure economic stability and avoid a repeat of the 2008 GFC, regulators require certain levels of capital and liquidity, focusing on the Tier 1 capital ratio.

Tier 1 capital is the highest-quality capital that a firm holds, consisting primarily of common stock and retained earnings, but also physical gold. It serves as the primary cushion against losses and is the first line of defense in times of financial distress.

This capital is divided by risk-weighted assets to derive the Tier 1 capital ratio. Risk-weighted means that cash and US treasury securities are assigned little risk while unsecured consumer loans and equity investments get much higher risk weights, for example.

New regulation after the 2008 financial crisis requires that all firms must maintain a Tier 1 capital ratio greater than 4.5%. On top of this, there are additional buffers based on scale, risk profile, and other regulatory classifications, so that at the end of the day, firms generally must maintain a 7-10% ratio at minimum.

Over the last two years, First Merchants has averaged a Tier 1 capital ratio of 11.3%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity, or ROE, tells us how much profit a company generates for each dollar of shareholder equity, a key funding source for banks. Over a long period, banks with high ROE tend to compound shareholder wealth faster through retained earnings, buybacks, and dividends.

Over the last five years, First Merchants has averaged an ROE of 10.3%, healthy for a company operating in a sector where the average shakes out around 7.5% and those putting up 15%+ are greatly admired. This is a bright spot for First Merchants.

It was encouraging to see First Merchants beat analysts’ tangible book value per share expectations this quarter. On the other hand, its net interest income missed and its EPS slightly exceeded Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $36.61 immediately after reporting.

Updated: December 3, 2025 at 11:44 PM EST

Before investing in or passing on First Merchants, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

We cheer for all companies supporting the economy, but in the case of First Merchants, we’ll be cheering from the sidelines. To kick things off, its revenue growth was uninspiring over the last five years. And while its estimated net interest income growth for the next 12 months is great, the downside is its estimated sales for the next 12 months are weak. On top of that, its projected EPS for the next year is lacking.

First Merchants’s P/B ratio based on the next 12 months is 0.9x. This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are more exciting stocks to buy at the moment.

Wall Street analysts have a consensus one-year price target of $45.60 on the company (compared to the current share price of $37.52).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.