First Merchants (FRME)

Regional banking company First Merchants (NASDAQ:FRME) fell short of the markets revenue expectations in Q4 CY2025, with sales falling 11.5% year on year to $172.2 million. Its non-GAAP profit of $0.98 per share was 3% 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.

Two primary revenue streams drive bank earnings. While net interest income, which is earned by charging higher rates on loans than paid on deposits, forms the foundation, fee-based services across banking, credit, wealth management, and trading operations provide additional income. Unfortunately, First Merchants’s 6.5% annualized revenue growth over the last five years was tepid. This fell short of our benchmark for the banking sector and is a poor baseline for our analysis.

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 missed Wall Street’s estimates and reported a rather uninspiring 11.5% year-on-year revenue decline, generating $172.2 million of revenue.

Net interest income made up 78.2% of the company’s total revenue during the last five years, meaning lending operations are First Merchants’s largest source of revenue.

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.

Topline growth alone doesn't tell the complete story - the profitability of that growth shapes actual earnings impact. Banks track this dynamic through efficiency ratios, which compare non-interest expenses such as personnel, rent, IT, and marketing costs to total revenue streams.

Investors place greater emphasis on efficiency ratio movements than absolute values, understanding that expense structures reflect revenue mix variations. Lower ratios represent better operational performance since they show banks generating more revenue per dollar of expense.

Over the last five years, First Merchants’s efficiency ratio has increased by 3.6 percentage points, going from 51.7% to 55.3%. 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 54.5% this quarter, beating analysts’ expectations by 105.2 basis points (100 basis points = 1 percentage point). This result was 1.9 percentage points worse 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 55.2%.

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 unimpressive 7.3% annual EPS growth over the last five years aligns with its revenue performance. On the bright side, this tells us its incremental sales were profitable.

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

For First Merchants, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.

In Q4, First Merchants reported adjusted EPS of $0.98, down from $1 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 3%. Over the next 12 months, Wall Street expects First Merchants’s full-year EPS of $3.89 to grow 6.4%.

Banks operate as balance sheet businesses, with profits generated through borrowing and lending activities. Valuations reflect this reality, emphasizing balance sheet strength and long-term book value compounding ability.

When analyzing banks, tangible book value per share (TBVPS) takes precedence over many other metrics. This measure isolates genuine per-share value by removing intangible assets of debatable liquidation worth. Traditional metrics like EPS are helpful but face distortion from M&A activity and loan loss accounting rules.

First Merchants’s TBVPS grew at a mediocre 4.6% annual clip over the last five years. However, TBVPS growth has accelerated recently, growing by 10% annually over the last two years from $24.96 to $30.18 per share.

Over the next 12 months, Consensus estimates call for First Merchants’s TBVPS to grow by 3.5% to $31.23, lousy 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 11.4%, which is considered safe and well capitalized in the event that macro or market conditions suddenly deteriorate.

Return on equity (ROE) reveals the profit generated per dollar of shareholder equity, which represents a key source of bank funding. Banks maintaining elevated ROE levels tend to accelerate wealth creation for shareholders via earnings retention, buybacks, and distributions.

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

It was encouraging to see First Merchants beat analysts’ tangible book value per share expectations this quarter. On the other hand, its revenue slightly missed and its EPS slightly exceeded Wall Street’s estimates. Overall, this was a softer quarter. The stock remained flat at $38.02 immediately after reporting.

Updated: January 26, 2026 at 11:33 PM EST

Before making an investment decision, investors should account for First Merchants’s business fundamentals and valuation in addition to what happened in the latest quarter.

We see the value of companies driving economic growth, but in the case of First Merchants, we’re out. To begin with, 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 net interest income growth was uninspiring over the last five years.

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 better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $45.60 on the company (compared to the current share price of $38.02).

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.