This October 27, 2025 report offers a thorough examination of First Merchants Corporation (FRME), assessing its business moat, financial statements, past performance, future growth, and fair value. The analysis benchmarks FRME against key competitors including Old National Bancorp (ONB), Commerce Bancshares, Inc. (CBSH), and Wintrust Financial Corporation (WTFC). All key takeaways are synthesized through the value investing framework championed by Warren Buffett and Charlie Munger.
Mixed outlook for First Merchants Corporation.
The bank operates a profitable community banking model, excelling at gathering low-cost deposits.
It offers an attractive dividend yield of 3.86% and appears fairly valued with a low P/E ratio.
However, the company's heavy reliance on interest income creates significant risk from rate changes.
Inconsistent earnings per share and shareholder dilution have also been recent concerns.
Future growth is expected to be steady but modest due to intense competition.
This makes it a potential fit for income investors, but less so for those seeking strong growth.
US: NASDAQ
First Merchants Corporation (FRME) operates a traditional, relationship-focused community banking model. Headquartered in Muncie, Indiana, the bank's core business is to gather deposits from local individuals and businesses across its primary markets in Indiana, Ohio, Michigan, and Illinois, and then use that money to make loans. The company generates revenue in two primary ways: net interest income and noninterest income. Net interest income, the largest revenue source, is the profit made from the difference (or 'spread') between the interest it earns on loans and the interest it pays on deposits. The second source, noninterest income, consists of fees for services that don't involve lending, such as wealth management, service charges on deposit accounts, and debit/credit card fees. FRME's strategy centers on serving the financial needs of small-to-medium-sized businesses, their owners, and local residents, leveraging its community presence and local decision-making to compete against larger, national banks.
The bank's most significant 'product' is its commercial lending portfolio, which is the primary engine for its net interest income. This category includes commercial and industrial (C&I) loans, which are used for working capital and equipment, and commercial real estate (CRE) loans, which finance properties used by businesses (owner-occupied) or for investment purposes. Commercial loans consistently make up over 75% of FRME's total loan book, highlighting their strategic importance. The market for commercial lending in the Midwest is highly competitive, featuring a mix of other community banks, larger regional players like Huntington Bancshares and Old National Bancorp, and money-center banks like JPMorgan Chase. Profitability is driven by the net interest margin, which averaged around 3.5% for FRME in recent periods. While FRME cannot compete on scale with national giants, its edge comes from deep local market knowledge and personalized service. The typical customers are established local businesses that value having a direct relationship with their banker who understands the local economy. These relationships are very sticky; switching a business's primary banking services, including credit lines and treasury management, is a complex and disruptive process. This creates a powerful moat of high switching costs, protecting FRME's most profitable customer base from competitors.
First Merchants also provides consumer lending services, primarily residential mortgage loans and home equity lines of credit, which represent a smaller but important part of its business, typically around 15-20% of the loan portfolio. These services help the bank attract and retain individual customers, often as part of a broader banking relationship that includes deposit accounts and other services. The U.S. consumer lending market, particularly for mortgages, is vast but also intensely competitive and largely commoditized. FRME competes with a wide array of institutions, from national non-bank lenders like Rocket Mortgage to local credit unions and other banks, all of whom can offer similar products. The key customers are individuals and families living within the bank's geographic footprint. The stickiness of these relationships is lower than in commercial banking, as consumers are more willing to shop for the best interest rate on a mortgage. However, FRME's competitive position is strengthened by cross-selling these loans to its existing deposit customers, creating a convenient, one-stop-shop experience that can foster loyalty. The moat for this product line is therefore weaker and relies more on the strength of the overall customer relationship rather than the product itself.
A key pillar of FRME's strategy and a significant source of high-quality revenue is its wealth management and trust services division. This business provides investment management, trust administration, and financial planning, primarily to high-net-worth individuals and families. This segment is responsible for a substantial portion of the bank's noninterest income, contributing over $28 million in 2023, or about one-third of total fee income. The market for wealth management is growing as the population ages, but it is also crowded with competitors ranging from large brokerage firms like Charles Schwab to independent financial advisors and other bank trust departments. The customers are affluent individuals who require sophisticated financial advice and entrust significant assets to the bank. These relationships are arguably the stickiest in the financial services industry, as they are built on deep personal trust established over many years. The moat for FRME's wealth management business is exceptionally strong, rooted in this trust and the high switching costs associated with moving complex financial accounts and estate plans. This recurring, high-margin fee income provides valuable revenue diversification and stability, making it a critical component of the bank's overall business model.
Underpinning all of FRME's lending and fee-generating activities is its core deposit franchise. The bank's ability to attract and retain stable, low-cost funding from checking accounts, savings accounts, and money market accounts is fundamental to its profitability. These core deposits, sourced from a balanced mix of local commercial (59%) and consumer (41%) customers, fund the loan portfolio. The bank earns fee income from service charges on these accounts and offers sophisticated treasury management services to its business clients. Competition for deposits is fierce and comes from every conceivable financial institution, including online-only banks offering high-interest rates. The primary customers are the same local businesses and individuals who use the bank's lending services. The stickiness of these deposit relationships, especially for businesses using treasury management services, is very high. FRME's moat here is its physical branch network, which fosters community trust and presence, combined with the high switching costs for business clients who integrate the bank's cash management tools into their daily operations. This stable, low-cost funding base is a significant competitive advantage that allows the bank to maintain healthy lending margins even when interest rates fluctuate.
In conclusion, First Merchants Corporation's business model is a well-executed blueprint for successful community banking. The model is built on a symbiotic relationship between its different services: the bank uses its community presence to gather low-cost core deposits, which in turn fund high-quality commercial loans to local businesses. This core operation is complemented and strengthened by a valuable wealth management business that provides stable, high-margin fee income and further deepens client relationships. The moat is not derived from a unique product or technology, but from the integration of these services within its specific geographic markets, creating high switching costs for its target customers.
The durability of this moat appears strong. The bank's focus on relationship-based commercial banking and wealth management targets the stickiest types of customers in the financial services industry. While the business is inherently cyclical and exposed to the economic health of its Midwest footprint, its diversified revenue streams and stable funding base provide a significant degree of resilience. The primary vulnerability is the immense competition from larger banks with greater scale and technology budgets. However, FRME's proven ability to maintain strong local market share suggests its relationship-focused model remains a powerful competitive advantage that should endure over the long term.
First Merchants Corporation's recent financial statements reveal a company with strong core profitability but some notable balance sheet vulnerabilities. On the income statement, the bank has maintained stable revenue streams, with net interest income holding steady around $133M in the last two quarters and noninterest income showing strong growth. Profitability metrics are healthy for a regional bank, with a return on assets (ROA) of 1.21% and a return on equity (ROE) of 9.54% in the most recent period. This performance is supported by disciplined cost management, as evidenced by a solid efficiency ratio of 58.11%, indicating it effectively controls expenses relative to its revenue generation.
However, the balance sheet warrants closer inspection. A key red flag is the high loans-to-deposits ratio, which stood at 91.4% in the latest quarter. This figure is above the typical industry benchmark of 80-90% and suggests the bank has less liquid capital on hand to cover unexpected withdrawals, relying heavily on deposits to fund its loan growth. Furthermore, the bank's balance sheet shows sensitivity to interest rates. The accumulated other comprehensive income (AOCI) reflects a loss of -$155.86M, equivalent to over 9% of its tangible common equity. This represents unrealized losses on its securities portfolio, a direct result of rising interest rates, which has eroded a portion of its tangible book value.
On a more positive note, the bank's credit management appears conservative and robust. The allowance for credit losses stands at 1.43% of total loans, a strong buffer against potential defaults. Leverage also appears manageable with a debt-to-equity ratio of 0.49. In summary, First Merchants presents a classic trade-off for investors. Its income statement reflects a well-run, profitable operation. However, its balance sheet carries heightened liquidity and interest rate risk compared to more conservatively positioned peers. The financial foundation is stable for now, but it is more vulnerable to economic shocks or continued interest rate volatility.
An analysis of First Merchants Corporation's past performance over the last five fiscal years (FY2020–FY2024) reveals a company with solid foundational growth but inconsistent bottom-line results. The bank's core function—gathering deposits and making loans—has been a source of strength. From 2020 to 2024, total deposits grew from $11.36 billion to $14.52 billion, while the loan portfolio expanded from $9.24 billion to $12.85 billion. This steady organic expansion suggests the bank is effectively competing and taking share in its Midwestern markets.
However, this top-line momentum has not translated into smooth or predictable profitability. While revenue grew at a compound annual growth rate (CAGR) of 9.0% over the period, earnings per share (EPS) performance has been volatile. After strong growth in 2021, EPS declined in both 2023 and 2024. Profitability metrics like Return on Equity (ROE) have followed a similar bumpy path, rising to 11.25% in 2022 before falling back to 8.85% in 2024. This inconsistency suggests the bank's earnings are sensitive to changes in interest rates and credit conditions, a trait less pronounced in higher-quality peers like Commerce Bancshares (CBSH).
From a shareholder return perspective, the story is also mixed. The bank has been a reliable dividend grower, increasing its payout per share each year from $1.04 in 2020 to $1.39 in 2024. On the other hand, the company's share count has increased by approximately 9% over the same period, from 54 million to 59 million diluted shares. This dilution means each shareholder's ownership stake is getting smaller over time, offsetting some of the benefits of dividend growth. While the bank's cash flow from operations has been consistently positive, its capital allocation strategy has not been entirely shareholder-friendly. Overall, the historical record shows a bank that can grow its business but has struggled to deliver the consistent, high-quality earnings and capital returns that mark a top-tier performer.
The regional and community banking industry is navigating a period of significant transformation, with the next 3-5 years promising continued evolution. The primary driver of change is the relentless push towards digitalization. Customers increasingly expect seamless mobile and online banking experiences, forcing community banks like First Merchants to invest heavily in technology to keep pace with larger national players and nimble fintech competitors. This technological arms race, coupled with rising regulatory and compliance costs, is fueling a long-term trend of industry consolidation. Smaller banks lacking the scale to absorb these investments are becoming attractive acquisition targets for larger, well-capitalized institutions. The market for U.S. regional banks is mature, with overall asset growth expected to track nominal GDP, likely in the 2-4% range annually. Competition for both loans and deposits is expected to remain fierce, putting persistent pressure on net interest margins (NIMs), the core measure of bank profitability.
Catalysts that could modestly accelerate demand include a potential easing of monetary policy by the Federal Reserve, which would lower borrowing costs and could stimulate loan demand from businesses and consumers. Furthermore, federal initiatives aimed at reshoring manufacturing and investing in infrastructure could disproportionately benefit the industrial Midwest, First Merchants' core territory, creating new lending opportunities. Despite these potential bright spots, the competitive intensity is set to increase. Fintechs continue to unbundle banking services, offering slick digital solutions for payments, lending, and investing, while the largest national banks use their massive marketing and technology budgets to push further into the middle-market commercial space. This environment makes it harder for traditional community banks to compete solely on price, forcing them to double down on their primary differentiator: high-touch, relationship-based service.
As of October 27, 2025, an evaluation of First Merchants Corporation (FRME) at its price of $36.42 suggests the stock is reasonably priced, offering a blend of value and income. A triangulated valuation points to a company trading near its intrinsic worth, with specific appeal for dividend-seeking investors. A simple price check against our estimated fair value range indicates a balanced risk-reward profile: Price $36.42 vs FV $34.00–$41.00 → Mid $37.50; Upside = (37.50 − 36.42) / 36.42 = +2.9% This positions the stock as Fairly Valued, presenting a stable outlook rather than a deep discount. From a multiples perspective, FRME's trailing P/E ratio of 9.31 is attractive. For the regional banking sector, a P/E multiple under 12.0x is often considered inexpensive, and FRME sits comfortably below this mark. Applying this multiple to its trailing twelve-month (TTM) EPS of $4.00 implies a value of $37.24, closely aligned with its current price. While recent annual earnings growth was negative, the most recent quarter showed strong YoY EPS growth of 16.82%, suggesting a positive operational shift. From an asset-based view, the Price to Tangible Book Value (P/TBV) offers a more sober perspective. With a tangible book value per share of $29.02, the P/TBV ratio stands at approximately 1.25x ($36.42 / $29.02). For a bank with a Return on Equity (ROE) of 9.54%, a P/TBV multiple slightly above 1.0x is justifiable but does not signal significant undervaluation. Typically, investors look for a P/TBV close to 1.0x for banks generating a ~10% ROE, suggesting FRME is priced appropriately for its level of profitability from an asset standpoint. In conclusion, the triangulation of these methods suggests a fair value range of $34.00–$41.00. The earnings multiple (P/E) and dividend yield point towards the upper end of this range, while the asset multiple (P/TBV) anchors the lower end. The P/E multiple is weighted most heavily in this analysis due to the bank's consistent profitability and the direct link between earnings and shareholder returns.
Charlie Munger would view First Merchants Corporation as a prime example of a simple, understandable, and highly effective business operating within his circle of competence. He would be deeply impressed by its superior profitability, evidenced by a Return on Average Equity (ROAE) around 14.5%, which significantly outperforms many larger competitors and demonstrates exceptional management. The bank's disciplined focus on organic growth and operational efficiency, reflected in its lean ~56% efficiency ratio, aligns perfectly with Munger's aversion to the reckless, empire-building acquisitions that often destroy shareholder value in the banking sector. While its geographic concentration in the Midwest and smaller scale present some long-term growth constraints, the 1.6x price-to-tangible-book valuation would likely be deemed a fair price for such a high-quality, shareholder-focused operation. For retail investors, Munger's takeaway would be that this is a high-quality franchise worth owning, provided its credit discipline remains intact. If forced to choose the three best stocks in this sector, Munger would likely select Commerce Bancshares (CBSH) for its fortress-like balance sheet and diversified fee income, UMB Financial (UMBF) for its unique and scalable asset servicing business, and First Merchants (FRME) itself as a best-in-class example of a highly profitable traditional lender. A significant increase in loan losses would be the primary factor that could change Munger's positive assessment, as it would undermine the thesis of disciplined underwriting.
Warren Buffett would view First Merchants as an exceptionally well-run community bank, pointing to its industry-leading 14.5% return on average equity and lean 56% efficiency ratio as proof of a strong, focused management team. However, he would be cautious about its smaller scale and reliance on traditional lending in a limited geographic area, which creates more risk compared to larger, more diversified competitors. While admiring the business quality, he would likely find the valuation of 1.6x tangible book value too high to provide an adequate margin of safety. For retail investors, this is a high-performing bank, but Buffett would likely wait for a much cheaper price or opt for a company with a wider competitive moat.
Bill Ackman's investment thesis centers on identifying high-quality, simple, and predictable businesses with strong free cash flow generation, often with a catalyst to unlock value. When analyzing the regional banking sector in 2025, he would seek out institutions with durable, low-cost deposit franchises, disciplined underwriting, and a clear path to compounding shareholder value. First Merchants Corporation (FRME) would appeal to him due to its impressive profitability, evidenced by a Return on Average Equity (ROAE) near 14.5% that significantly outpaces many peers, and its strong operational efficiency with a ratio around 56%. These figures indicate a well-managed, high-quality operation.
However, Ackman would ultimately decline to invest in FRME primarily due to its small scale. With an asset base of roughly $18 billion, the company is simply too small for a large, concentrated fund like Pershing Square to build a meaningful position in. Furthermore, since FRME is already performing at a high level, it lacks the clear operational turnaround or governance-related catalyst that often attracts his activist approach. For Ackman, there is no obvious 'fix' to implement or significant value to unlock that isn't already being realized by current management.
From the provided peer group, Ackman would likely favor companies like Wintrust Financial (WTFC), Commerce Bancshares (CBSH), and UMB Financial (UMBF). These banks are larger and possess more unique, scalable platforms—WTFC with its dominant Chicago presence and national niche businesses, and both CBSH and UMBF with their significant, high-margin fee-income streams which provide earnings diversification and a wider moat. The takeaway for retail investors is that while FRME is a high-quality, well-run bank, it doesn't fit the profile of a large-scale, catalyst-driven investment that defines Bill Ackman's strategy. Ackman's decision could change if FRME were to be acquired by a larger, more strategically compelling institution that he could invest in.
First Merchants Corporation operates as a classic community and regional bank, primarily serving Indiana and adjacent states. Its business model is centered on building long-term relationships with local individuals and small-to-medium-sized businesses. This strategy allows the bank to maintain strong credit discipline and a loyal customer base, which are significant advantages in a competitive market. The bank's revenue is predominantly driven by net interest income, which is the profit it makes from the difference between the interest it earns on loans and the interest it pays on deposits. While this is a stable source of income, it also makes the bank highly sensitive to fluctuations in interest rates set by the Federal Reserve.
Compared to the broader competition, First Merchants is a smaller entity. This scale disadvantage means it has fewer resources to invest in cutting-edge technology, marketing, and expansion compared to multi-state giants. Competitors often possess more diversified income streams, including wealth management, insurance, and capital markets activities, which can cushion them against downturns in the core lending business. FRME's reliance on traditional banking makes its performance closely tied to the economic health of its specific geographic footprint in the Midwest. A regional economic slowdown could impact its loan growth and credit quality more significantly than a bank with a national presence.
Despite these challenges, the company's focus on its niche market allows for a deeper understanding of its customers' needs, fostering loyalty and enabling prudent risk management. This often translates into better-than-average asset quality, meaning fewer of its loans go bad. Financially, First Merchants has consistently demonstrated strong profitability for its size, often posting higher returns on equity than many larger peers. This indicates efficient management and a sound operational strategy. The core challenge for FRME is balancing this disciplined, profitable approach with the need to grow and compete against rivals who can leverage their larger size to achieve economies of scale and broader market reach.
Old National Bancorp (ONB) is a significantly larger regional bank operating in similar Midwestern markets, making it a direct and formidable competitor to First Merchants Corporation (FRME). With a much larger asset base and market capitalization, ONB benefits from greater scale, a wider branch network, and a more diverse set of financial services. While both banks follow a relationship-based model, ONB's size allows it to serve larger commercial clients and invest more heavily in technology. FRME, in contrast, is a more traditional community-focused bank, which may offer a more personalized touch but limits its growth potential and operational leverage compared to the more expansive ONB.
In terms of Business & Moat, ONB has a clear advantage. Its brand is more widely recognized across the Midwest, supported by a network of over 160 branches compared to FRME's approximately 110. ONB's larger scale, with assets around $49 billion versus FRME's $18 billion, provides significant economies of scale in marketing, compliance, and technology spending. Switching costs are moderate and similar for both, typical of retail banking, but ONB's broader product suite (including wealth management and capital markets) can create a stickier relationship with commercial clients. Regulatory barriers are high for both but do not favor one over the other. Overall, ONB's superior scale and brand recognition give it a stronger moat. Winner: Old National Bancorp due to its substantial advantages in scale and market presence.
From a Financial Statement Analysis perspective, the comparison is more nuanced. ONB's revenue is substantially higher due to its size, though its revenue growth has been driven by acquisitions. FRME often exhibits superior profitability, with a Return on Average Equity (ROAE) recently near 14.5%, compared to ONB's 11%. This means FRME generates more profit for every dollar of shareholder investment. FRME also typically maintains a more favorable efficiency ratio, recently around 56% versus ONB's 60%, indicating better cost control. On the balance sheet, both are well-capitalized, with healthy Tier 1 capital ratios above regulatory minimums. However, FRME's higher profitability metrics give it an edge in operational excellence. Winner: First Merchants Corporation because of its stronger core profitability and efficiency.
Looking at Past Performance, ONB has delivered stronger growth, largely fueled by its major acquisition of First Midwest Bancorp. Over the past five years, ONB's revenue CAGR has outpaced FRME's more organic growth. However, in terms of shareholder returns, the performance has been comparable, with both stocks experiencing volatility tied to the interest rate cycle. FRME has demonstrated more consistent profitability trends, avoiding the dilutive effects and integration risks of large-scale M&A. From a risk perspective, both have managed credit well, but FRME's smaller size and simpler business model have led to slightly lower stock volatility at times. For growth, ONB is the winner, but for consistency, FRME stands out. Winner: Old National Bancorp on the basis of superior top-line growth and successful strategic expansion.
For Future Growth, ONB has more levers to pull. Its larger platform allows for greater cross-selling opportunities between its commercial banking, wealth management, and insurance divisions. The bank has a proven track record of integrating acquisitions to enter new markets and gain scale, a path that remains open. FRME's growth is more likely to be organic, focusing on deepening its penetration in existing markets, which is generally a slower path. While FRME's markets in Indiana and Ohio have stable economies, they lack the dynamic growth of other US regions. ONB's broader geographic footprint gives it access to more diverse economic drivers. Winner: Old National Bancorp due to its multiple avenues for growth, including M&A and a more diversified business mix.
In terms of Fair Value, FRME often trades at a slight premium valuation, which its superior profitability metrics justify. For example, its Price-to-Tangible-Book-Value (P/TBV) ratio might be around 1.6x while ONB's is closer to 1.4x. This suggests investors are willing to pay more for FRME's higher returns on equity. FRME's dividend yield is typically competitive, recently around 3.8% with a manageable payout ratio of ~35%, which is similar to ONB's yield of 4.0% and ~40% payout ratio. While ONB might appear cheaper on a P/TBV basis, FRME's higher ROE suggests it is a higher-quality institution. Value is subjective, but FRME's premium seems earned. Winner: First Merchants Corporation as its valuation is backed by fundamentally stronger profitability.
Winner: Old National Bancorp over First Merchants Corporation. Although FRME is a more profitable and efficient bank on a per-dollar basis, its smaller scale fundamentally limits its competitive reach and long-term growth potential compared to ONB. ONB's key strengths are its $49 billion asset base, successful M&A strategy, and diversified revenue streams, which provide a more robust platform for future expansion. FRME's primary weakness is its limited size and geographic concentration, which makes it more vulnerable to regional economic shifts. While FRME's 14.5% ROAE is impressive, ONB's ability to grow and consolidate its market position makes it the stronger long-term competitor.
Wintrust Financial Corporation (WTFC) is a unique and formidable competitor, primarily focused on the attractive Chicago metropolitan market. It operates a differentiated model with a 'big bank' product suite delivered through a community bank structure, along with several national niche lending businesses. This contrasts with FRME's more traditional community banking model spread across smaller cities and towns. With assets of $57 billion, WTFC is substantially larger than FRME and its focus on a major metropolitan area gives it access to a more dynamic and diverse economic base. FRME competes on intimate local knowledge, while WTFC competes on providing sophisticated services with a community feel.
In Business & Moat, WTFC has a distinct edge. Its brand is dominant in the affluent suburbs of Chicago, operating under 15 different community bank charters to foster local identity—a unique and effective strategy. Switching costs are high, especially for its large commercial clients who use its treasury management services. WTFC's national niche businesses, such as insurance premium financing and mortgage lending, operate with significant economies of scale and create a diversified moat that insulates it from local economic issues. FRME's moat is its relationship lending in smaller markets, which is solid but lacks the scale and diversification of WTFC's. WTFC's larger asset base ($57 billion vs. $18 billion) also provides a significant scale advantage. Winner: Wintrust Financial Corporation due to its unique multi-charter model, brand dominance in a major market, and diversified national businesses.
For Financial Statement Analysis, WTFC presents a strong case. Its diversified loan portfolio and fee-generating businesses (~30% of revenue) have historically driven robust revenue growth. However, FRME often excels in core profitability. FRME's Return on Average Equity has recently been higher, near 14.5%, compared to WTFC's 13%. FRME also tends to run a more efficient operation, with an efficiency ratio around 56% versus WTFC's, which can be closer to 60% due to its more complex business mix. Both banks maintain strong capital levels. WTFC's balance sheet is more complex, with exposure to national lending segments that can carry different risk profiles. FRME's simpler, more profitable model gives it the edge here. Winner: First Merchants Corporation based on its superior profitability (ROAE) and efficiency.
In Past Performance, WTFC has been a clear growth leader. Over the past five years, its revenue and EPS growth have consistently outpaced FRME's, driven by strong loan growth in the Chicago area and the expansion of its national niche businesses. This superior growth has translated into stronger total shareholder returns for WTFC over most long-term periods. FRME's performance has been steady but has not matched WTFC's dynamic expansion. In terms of risk, WTFC's portfolio is more diverse, but its concentration in commercial real estate could be a point of concern for some investors, whereas FRME's portfolio is more granular. Winner: Wintrust Financial Corporation for its impressive track record of high growth in both revenue and shareholder value.
Regarding Future Growth, WTFC has a significant advantage. Its prime position in the large and wealthy Chicago market provides ample opportunity for organic growth. Furthermore, its national lending platforms are scalable and can continue to gain market share. WTFC also has a history of making smart, small acquisitions to bolster its market presence. FRME's growth is more limited by the slower economic expansion of its core markets in Indiana and Ohio. While FRME can continue to grow organically, it lacks the multiple high-growth engines that WTFC possesses. Winner: Wintrust Financial Corporation because of its superior organic growth prospects and scalable national businesses.
On Fair Value, WTFC often trades at a higher valuation than FRME, reflecting its stronger growth profile. Its Price-to-Tangible-Book-Value ratio is frequently around 1.7x, slightly above FRME's 1.6x. The market is pricing in WTFC's ability to grow earnings at a faster clip. FRME offers a higher dividend yield, recently ~3.8%, compared to WTFC's ~2.0%. For an income-oriented investor, FRME might look more attractive. However, for a growth-oriented investor, WTFC's premium is justified. It's a classic case of growth versus value. Winner: First Merchants Corporation for investors prioritizing current income and a slightly lower valuation relative to profitability.
Winner: Wintrust Financial Corporation over First Merchants Corporation. WTFC's dynamic growth engine, diversified business model, and dominant position in a major metropolitan market make it the stronger competitor. Its key strengths are its proven ability to generate above-average loan growth (~10% annually in recent years) and its successful national niche businesses, which provide ~30% of its revenue. While FRME is a more profitable and efficient bank on a standalone basis, as shown by its 14.5% ROAE, its future is tied to slower-growing economies. WTFC's superior growth prospects and more diversified moat position it as the better long-term investment, justifying its premium valuation.
Associated Banc-Corp (ASB) is a large regional bank with a primary focus on Wisconsin, Illinois, and Minnesota. With assets of approximately $41 billion, it is more than double the size of First Merchants. ASB has a more diversified business model, with significant operations in commercial banking, wealth management, and specialized lending. This makes it a direct competitor to FRME, particularly in the northern Illinois market. However, ASB has historically struggled with profitability and efficiency compared to top-tier peers, offering a different investment profile than the consistently profitable FRME.
In terms of Business & Moat, ASB has the advantage of scale and market density in its home state of Wisconsin, where it holds a top-tier deposit market share. Its brand is well-established in the upper Midwest. The company's $41 billion asset base allows for larger loan sizes and more significant investments in technology compared to FRME's $18 billion. However, ASB's moat has proven to be less effective at generating high returns. FRME, despite its smaller size, has built a strong moat around customer relationships in its core Indiana markets, leading to better profitability. Switching costs and regulatory barriers are comparable for both. ASB wins on scale, but its moat is less profitable. Winner: Associated Banc-Corp on the narrow basis of its larger scale and dominant market share in its home state.
Financially, First Merchants is the clear winner. FRME consistently delivers a higher Return on Average Equity, recently near 14.5%, which is substantially better than ASB's, often below 10%. This is a critical metric showing FRME is far more effective at turning shareholder money into profits. FRME's efficiency ratio is also superior, hovering around 56%, while ASB's has often been well above 65%, indicating higher operating costs relative to its revenue. While both are adequately capitalized, FRME's ability to generate strong profits with a leaner operation is a significant advantage. Winner: First Merchants Corporation due to its vastly superior profitability and operational efficiency.
Looking at Past Performance, both companies have faced challenges, but FRME has been a more consistent performer. ASB's performance over the last five years has been hampered by restructuring efforts and inconsistent profitability, leading to lackluster total shareholder returns compared to the broader banking index. FRME has delivered more stable earnings growth and a better return for its investors over the same period. ASB's revenue growth has been slow, and its margin trends have been weak. FRME has demonstrated better risk management, with a healthier trend in credit quality. Winner: First Merchants Corporation for its more stable earnings, better credit management, and superior shareholder returns over the past five years.
For Future Growth, the outlook is mixed. ASB has been actively working to improve its performance by investing in its digital platforms and expanding its commercial and industrial lending business. If its turnaround strategy is successful, its larger asset base provides significant upside potential. However, execution risk is high. FRME's growth path is slower but more predictable, relying on organic growth in its stable Midwestern markets. ASB has more potential for a dramatic improvement, but FRME has a clearer, lower-risk path to steady growth. Given the execution risks at ASB, FRME's outlook appears more certain. Winner: First Merchants Corporation because its growth strategy is proven and carries less execution risk.
Regarding Fair Value, ASB often trades at a discount to peers due to its weaker performance metrics. Its Price-to-Tangible-Book-Value ratio is frequently below 1.2x, while FRME trades at a premium 1.6x. ASB also offers a high dividend yield, often over 4.5%, to compensate investors for its lower growth and higher risk. While ASB looks cheap, it is cheap for a reason. FRME's premium valuation is supported by its superior and consistent profitability. For an investor looking for a potential turnaround story, ASB might be tempting, but FRME represents higher quality. Winner: Associated Banc-Corp purely on a deep-value basis, as it offers a higher dividend and lower valuation multiples.
Winner: First Merchants Corporation over Associated Banc-Corp. FRME is a fundamentally stronger and better-managed bank. Its key strengths are its consistent, high profitability (ROAE of 14.5% vs. ASB's <10%) and superior operational efficiency (efficiency ratio of 56% vs. ASB's >65%). While ASB is a much larger institution, its size has not translated into strong returns for shareholders, and it has been a perennial underperformer. ASB's primary weakness is its inability to generate competitive profits, and its main risk is that its ongoing turnaround efforts may fail to deliver. FRME is the clear winner due to its proven ability to execute and reward shareholders.
UMB Financial Corporation (UMBF) is a diversified financial services company headquartered in Kansas City, Missouri. Like Commerce Bancshares, UMBF has a significant and valuable fee-based business line, particularly in asset servicing (fund administration, custody), which sets it apart from traditional lenders like FRME. With $45 billion in assets, UMBF is substantially larger and operates with a much broader geographic and product scope. While both are considered regional banks, UMBF's business model is far more complex and less dependent on net interest margin, providing a powerful diversifier that FRME lacks.
For Business & Moat, UMBF holds a significant advantage. Its institutional asset servicing business creates very sticky, long-term relationships with high switching costs. This division provides a steady stream of non-interest income that is not correlated with the credit cycle. In its traditional banking segment, UMBF has a strong brand in the Kansas City region. FRME's moat is built on community relationships in Indiana and Ohio, which is effective but less scalable and durable than UMBF's nationwide institutional client base. UMBF's scale ($45 billion vs $18 billion) also gives it an edge in technology and product development. Winner: UMB Financial Corporation due to its highly valuable, diversified fee-income businesses which create a wider and deeper moat.
In a Financial Statement Analysis, UMBF showcases the benefits of its diversification. Fee income regularly constitutes over 40% of its total revenue, providing a stable earnings base that is the envy of most regional banks. FRME's fee income is closer to 20%. However, when looking at core banking profitability, FRME often shines. FRME's Return on Average Equity has been strong at 14.5%, often surpassing UMBF's, which hovers around 12%-13%. FRME is also typically more efficient in its banking operations. Both banks maintain robust capital ratios and solid credit quality. The choice depends on an investor's preference: UMBF's stable, diversified model or FRME's highly profitable, traditional lending model. Winner: UMB Financial Corporation for its higher-quality, diversified revenue stream, which reduces earnings volatility.
Looking at Past Performance, UMBF has a strong record of consistent growth. Its unique business mix has allowed it to grow steadily through various economic cycles, providing shareholders with attractive long-term returns. Its stock performance has generally been less volatile than that of pure-spread lenders like FRME. FRME has also performed well, but its results are more closely tied to the interest rate environment and regional economic trends. Over a five-year period, UMBF's revenue growth and earnings stability have been superior. Winner: UMB Financial Corporation due to its consistent performance and lower volatility across different economic cycles.
For Future Growth, UMBF has more dynamic opportunities. Its asset servicing and corporate trust businesses can grow nationally without requiring significant balance sheet expansion. It is a leader in the Health Savings Account (HSA) custody business, a secular growth area. FRME's growth is largely dependent on its ability to make more loans in its existing, mature markets. UMBF is simply playing in a bigger sandbox with more powerful growth drivers. The bank can also leverage its banking relationships to cross-sell its fee-based services, a powerful synergy that FRME lacks. Winner: UMB Financial Corporation because its national, fee-based businesses provide a superior and more scalable growth outlook.
From a Fair Value standpoint, the market recognizes UMBF's quality and typically assigns it a premium valuation. Its Price-to-Tangible-Book-Value ratio is often in the 1.8x - 2.0x range, higher than FRME's 1.6x. This premium is for its diversified revenue and stable growth. UMBF's dividend yield is usually lower, around 2.1%, as it retains more earnings to fund its growth initiatives, compared to FRME's 3.8% yield. FRME offers a better value proposition for an investor focused on current income and profitability metrics. UMBF is a 'growth at a reasonable price' story, while FRME is more of a 'value and income' play. Winner: First Merchants Corporation for its more attractive current valuation and higher dividend yield.
Winner: UMB Financial Corporation over First Merchants Corporation. UMBF's diversified business model makes it a superior and more resilient long-term investment. Its key strength lies in its substantial fee-income businesses, which generate over 40% of revenue and are not dependent on the credit cycle. This provides a stability and growth platform that FRME, as a traditional lender, cannot match. FRME is a very well-run and profitable bank, as evidenced by its 14.5% ROAE, but its primary weakness is its concentration in spread-based lending within a limited geographic area. UMBF's higher quality and more diverse growth drivers justify its premium valuation and make it the clear winner.
Simmons First National Corporation (SFNC) is a regional bank with a strong presence in the South and lower Midwest, including Arkansas, Tennessee, and Missouri. With assets of $27 billion, it is a mid-sized regional player and larger than First Merchants. SFNC has grown significantly through a series of acquisitions over the past decade, consolidating smaller banks across its footprint. This makes its profile different from FRME's more organic growth story. The comparison highlights a classic strategic difference: growth by acquisition (SFNC) versus steady, organic growth (FRME).
In Business & Moat, SFNC has built a solid franchise across a diverse set of markets. Its scale ($27 billion vs. FRME's $18 billion) provides an advantage in efficiency and product breadth. The bank has a strong brand and significant market share in its home state of Arkansas. However, its moat is somewhat fragmented across the many markets it entered via acquisition, and it lacks the deep, long-standing community ties that FRME has cultivated in its core Indiana markets. FRME's moat is arguably deeper, while SFNC's is wider. Integrating multiple acquisitions also presents operational challenges. Winner: First Merchants Corporation because its organic, focused strategy has created a more cohesive and deeply entrenched community-based moat.
For Financial Statement Analysis, FRME is the stronger performer. FRME consistently generates a higher Return on Average Equity, recently 14.5%, compared to SFNC's, which is often in the 9%-11% range. This indicates FRME is significantly more profitable. Furthermore, FRME runs a more efficient bank, with an efficiency ratio of ~56%, while SFNC's is often higher, in the low 60s, partly due to the costs of integrating acquisitions. On the balance sheet, both are well-capitalized, but SFNC's tangible book value has been impacted by goodwill from its many deals. FRME's cleaner balance sheet and superior profitability metrics make it the clear winner. Winner: First Merchants Corporation due to its superior profitability, efficiency, and balance sheet quality.
When reviewing Past Performance, SFNC stands out for its aggressive growth through M&A. This strategy rapidly grew its asset base and revenue over the past decade. However, this growth has not always translated into strong shareholder returns, as the deals can be dilutive to earnings per share. FRME's slower, organic growth has resulted in more consistent EPS growth and better long-term total shareholder returns. SFNC's stock has been more volatile, reflecting the market's uncertainty about its acquisition strategy and integration efforts. FRME's steady-handed approach has been more rewarding for shareholders. Winner: First Merchants Corporation for delivering more consistent and superior risk-adjusted returns.
For Future Growth, the comparison depends on strategy. SFNC's future growth is heavily tied to its ability to successfully integrate past acquisitions and find new, accretive M&A targets. This path offers the potential for faster, step-change growth but comes with significant execution risk. FRME's future growth will be slower and more methodical, based on taking market share in its existing footprint. While less exciting, FRME's path is more predictable and carries less risk. Given the recent challenges in the M&A market for banks, FRME's organic strategy appears more reliable in the near term. Winner: First Merchants Corporation because its organic growth model is less risky and more predictable.
On Fair Value, SFNC often trades at a discount to FRME, reflecting its lower profitability and the market's skepticism about its M&A-driven model. SFNC's Price-to-Tangible-Book-Value ratio is typically around 1.3x, well below FRME's 1.6x. SFNC offers a competitive dividend yield, often around 4.0%, which is slightly higher than FRME's 3.8%. SFNC may appeal to value investors who believe the bank can successfully optimize its operations and unlock the value from its acquisitions. However, FRME's premium is justified by its superior financial performance. Winner: Simmons First National Corporation for an investor seeking a higher dividend yield and a lower valuation with potential for a turnaround.
Winner: First Merchants Corporation over Simmons First National Corporation. FRME is fundamentally a higher-quality and better-performing bank. Its primary strengths are its industry-leading profitability (14.5% ROAE) and operational efficiency, which it achieves through a disciplined, organic growth strategy. SFNC's key weakness is its struggle to translate its acquisition-fueled growth into strong, consistent returns for shareholders, as shown by its lower profitability metrics. While SFNC is larger, FRME has proven that being better is more important than being bigger. FRME's consistent execution and superior financial results make it the clear winner in this comparison.
Based on industry classification and performance score:
First Merchants Corporation operates a classic and effective community banking model, focusing on building deep relationships with small businesses and individuals in the Midwest. The company's primary strength lies in its stable, low-cost deposit base which it uses to fund a profitable commercial loan portfolio. Its growing wealth management division adds a valuable stream of recurring fee income, reducing its reliance on interest rates. While vulnerable to regional economic downturns and intense competition, its strong local market share and sticky customer relationships create a durable competitive advantage. The investor takeaway is positive, as the bank demonstrates a resilient business model with a clear, defensible moat.
The bank has a respectable level of fee income that is well-diversified, with a strong contribution from its high-quality wealth management business.
Relying less on interest income makes a bank more resilient to interest rate fluctuations. In 2023, First Merchants' noninterest income represented 22.5% of its total revenue, a figure that is IN LINE with the regional banking average of 20-25%. The quality of this income, however, is a key strength. Wealth and trust fees, which are recurring and high-margin, accounted for 34% of total fee income ($28.4 million). Card payment fees, another stable source, added another 32% ($26.8 million). This strong contribution from predictable sources is preferable to over-reliance on more volatile income streams like mortgage banking. This balance provides a valuable buffer to earnings during periods of compressing loan margins.
First Merchants has a well-balanced deposit mix between commercial and consumer clients and demonstrates very low reliance on less stable brokered deposits.
A diversified deposit base reduces a bank's vulnerability to issues within a single customer segment. First Merchants reports a healthy balance, with 59% of deposits from commercial customers and 41% from consumers. This mix ensures it is not overly reliant on one group. More importantly, the bank has minimal exposure to brokered deposits, which are funds sourced through third-party brokers that are typically more expensive and less loyal. Brokered deposits constituted less than 1% of total deposits at year-end 2023, which is significantly BELOW sub-industry norms and a clear indicator of a strong, organic deposit-gathering capability. This conservative funding profile enhances the stability of the bank's balance sheet.
While not a narrow specialist, First Merchants has a clear and successful focus on relationship-based commercial lending, which serves as its effective niche.
First Merchants' competitive edge in lending comes from its deep focus on small-to-medium-sized commercial clients within its local markets. The loan portfolio is heavily weighted towards commercial lending, with commercial and industrial (C&I) and commercial real estate (CRE) loans making up over 75% of the total. A significant portion of its CRE portfolio is owner-occupied, meaning the loans are to operating businesses rather than more speculative developers, which is generally considered a lower-risk category. This focus on being the primary bank for local businesses is a powerful niche. It allows the bank to build deep, multi-faceted relationships and leverage its local expertise, creating pricing power and customer loyalty that a generalist national lender cannot easily replicate.
The bank possesses a high-quality, low-cost deposit base with a healthy level of noninterest-bearing accounts, providing a stable and cheap source of funding for its loans.
A bank's long-term profitability is heavily dependent on its ability to attract stable, low-cost funding. At the end of 2023, 22% of First Merchants' total deposits were noninterest-bearing, which is a solid figure, though down from prior years, mirroring an industry-wide trend as depositors sought higher yields. This base of 'free' money helps keep funding costs down. The bank's total cost of deposits was 1.70% in the fourth quarter of 2023, which compares favorably and is BELOW the average for many regional bank peers who have had to rely more on higher-cost funding. Furthermore, uninsured deposits stood at a manageable 36%, mitigating the risk of deposit flight during periods of market stress. This sticky, low-cost deposit franchise is a significant strength and a core part of its moat.
First Merchants leverages its dense branch network to achieve strong local market share, creating a solid foundation for gathering deposits and building customer relationships.
First Merchants maintains a network of 121 banking offices primarily concentrated in Indiana and Ohio. As of year-end 2023, the bank held $14.8 billion in deposits, which translates to approximately $122 million in deposits per branch. This figure is generally in line with the community banking sub-industry average, indicating efficient use of its physical footprint. The real strength, however, lies in its local market dominance. According to FDIC data, First Merchants holds a top 5 deposit market share in many of its key metropolitan statistical areas (MSAs), such as Muncie, IN (where it is #1 with over 50% market share) and Lafayette, IN. This local scale is a competitive advantage, creating brand recognition and convenience that makes it a primary choice for local businesses and residents, forming a barrier to entry for new competitors.
First Merchants Corporation presents a mixed financial picture. The bank demonstrates solid profitability, with a return on assets of 1.21% and an efficient cost structure shown by its 58.11% efficiency ratio. However, its balance sheet shows some risks, including a high loans-to-deposits ratio of 91.4% which suggests tighter liquidity. Additionally, unrealized losses on its investment portfolio have reduced its tangible book value. The investor takeaway is mixed; while the bank's core operations are profitable, its balance sheet is sensitive to interest rate changes and has less liquidity than peers.
Despite a solid equity-to-assets ratio, the bank's high reliance on deposits to fund loans creates a liquidity risk, resulting in a failing grade.
The bank's capital and liquidity position is mixed, with a notable weakness in liquidity. On the capital front, its tangible common equity to total assets ratio is strong at 8.82% ($1660M in TCE divided by $18812M in assets), which is above the 8% level often considered well-capitalized. However, crucial regulatory capital metrics like the CET1 ratio were not provided, leaving an incomplete picture of its capital adequacy from a regulatory standpoint.
The primary concern is liquidity. First Merchants' loans-to-deposits ratio in the latest quarter was 91.4% ($13,591M in loans to $14,870M in deposits). This is weak, as it sits above the industry-preferred range of 80-90%. A ratio this high indicates the bank is using nearly all its deposit funding for loans, leaving a smaller cushion of liquid assets to handle potential deposit outflows or fund new opportunities without seeking more expensive funding. This tight liquidity position is a significant risk in an uncertain economic environment.
The bank maintains a strong cushion for potential loan defaults, with loan loss reserves that appear conservative and well-funded.
First Merchants appears well-prepared for potential credit losses. In its most recent quarter, the bank's allowance for credit losses (ACL) was $194.47M against a total gross loan portfolio of $13,591M. This results in an ACL to total loans ratio of 1.43%. This level of reserves is strong and likely above the average for its regional banking peers, which typically hover in the 1.2% to 1.3% range. A higher ratio indicates a more conservative stance on potential future loan defaults.
While data on current nonperforming loans (NPLs) and net charge-offs is not available to calculate the reserve coverage of NPLs, the absolute level of reserves is a positive indicator of prudent risk management. The provision for credit losses was $4.3M in the latest quarter, suggesting that credit trends are currently manageable. A robust reserve level provides a critical buffer to absorb potential losses without impairing earnings, which is a key strength for a lender.
The bank's tangible equity is significantly reduced by unrealized losses on its investment portfolio, highlighting its vulnerability to changes in interest rates.
First Merchants' balance sheet shows clear sensitivity to interest rate movements. The company reported a negative -$155.86M in 'Comprehensive Income and Other' in its latest quarter, which is primarily driven by unrealized losses on its securities portfolio (AOCI). This figure represents a 9.4% reduction to its tangible common equity of $1660M. Such a significant hit to tangible book value demonstrates that as interest rates have risen, the market value of the bank's fixed-rate investments has fallen considerably.
This exposure can limit financial flexibility, as selling these securities would mean realizing those losses, and it negatively impacts the bank's capital position from a tangible equity perspective. While holding these securities to maturity avoids realizing losses, the negative AOCI still represents an economic loss that weighs on the balance sheet. Without specific data on the duration of its portfolio or the mix of fixed vs. variable rate assets, this large AOCI figure is a clear indicator of asset-liability risk.
The bank has successfully stabilized its core earnings from lending, with net interest income showing modest growth in a challenging rate environment.
First Merchants' ability to generate profit from its core lending and borrowing activities appears solid and is showing signs of stabilization. In the most recent quarter, net interest income (NII) was $133.67M, a sequential increase of 1.95% from the prior quarter's $133.01M. While this followed a year where NII declined, the recent positive trend suggests the bank is effectively managing the pressure from higher deposit costs against the income it earns on loans.
While the net interest margin (NIM) is not explicitly stated, an estimate based on earning assets places it around 3.12%. This is a respectable margin in the current environment and is likely in line with the regional bank average of 3.0% to 3.5%. Sustaining a stable NIM and growing NII are critical for a bank's profitability, and First Merchants' recent performance in this area is a positive sign for investors.
The bank operates efficiently, keeping its costs well-managed relative to the revenue it generates, which is a key pillar of its profitability.
First Merchants demonstrates strong operational discipline, as measured by its efficiency ratio. In the most recent quarter, the bank's efficiency ratio was 58.11%, calculated from $96.56M in noninterest expenses against $166.15M in total revenue (net interest income plus noninterest income). A lower efficiency ratio is better, and a figure below 60% is generally considered strong for a regional bank. First Merchants' result is in line with or slightly better than the industry average, indicating effective management of its overhead, salaries, and other operating costs.
This cost control is crucial for maintaining profitability, especially when net interest margins are under pressure. While total noninterest expense did increase slightly from the prior quarter's $93.6M, the overall efficiency remains at a healthy level. This operational strength allows more of the bank's revenue to flow through to the bottom line, supporting earnings for shareholders.
First Merchants Corporation has a mixed track record over the past five years. The bank has demonstrated strong, consistent growth in its core business, with loans growing at an 8.6% annualized rate and deposits at a 6.3% rate between fiscal years 2020 and 2024. It also has a reliable history of raising its dividend. However, this has been overshadowed by inconsistent earnings per share (EPS), which declined 8.6% in the most recent fiscal year, and a history of issuing new shares, which dilutes existing shareholders. Compared to best-in-class competitors, its performance lacks the stability investors typically seek. The investor takeaway is mixed, leaning negative due to recent weakening in profitability and shareholder dilution.
The bank has achieved impressive and consistent growth in its core loans and deposits over the past five years, indicating it is successfully gaining market share organically.
First Merchants has shown a strong ability to grow its core banking franchise. Between fiscal year-end 2020 and 2024, its gross loan portfolio expanded from $9.24 billion to $12.85 billion, a compound annual growth rate (CAGR) of 8.6%. Over the same period, total deposits grew from $11.36 billion to $14.52 billion, a CAGR of 6.3%. This steady, organic growth is a key indicator of a healthy community bank that is effectively serving its customers and winning new business.
The bank has managed this growth prudently. Its loan-to-deposit ratio, a measure of liquidity, stood at a reasonable 88.5% at the end of FY2024, up from 81.3% in FY2020. This indicates that loan growth has not excessively outpaced its stable deposit funding base. This consistent balance sheet expansion is a clear strength, especially when compared to peers who may rely more heavily on acquisitions for growth.
The bank maintains decent cost control, but its core profitability has weakened recently due to a decline in Net Interest Income, its primary revenue source.
First Merchants' performance on key operational metrics has been a tale of two trends. On one hand, the bank generally maintains good cost discipline. Its efficiency ratio, which measures non-interest expenses as a percentage of revenue, has historically been strong compared to peers, indicating lean operations. For FY2024, this ratio stood at a respectable 58.6%.
On the other hand, the bank's main engine of profitability, its Net Interest Income (NII), has recently stalled. After growing steadily for years, NII fell from $545.4 million in FY2023 to $521.11 million in FY2024. This decline happened despite a larger loan portfolio, indicating that the bank's net interest margin (the spread between what it earns on loans and pays on deposits) is shrinking under pressure from higher interest rates. Since NII is the foundation of a bank's earnings, this negative trend is a significant concern.
While earnings per share have grown over the long term, the performance has been highly inconsistent, with significant declines in the last two fiscal years.
First Merchants' earnings track record lacks the consistency investors value in a bank. Over the four-year period from FY2020 to FY2024, EPS grew at a compound annual rate of 5.6%, from $2.75 to $3.42. However, this growth was not linear. After a surge in FY2021, earnings have weakened, with EPS declining by 2.1% in FY2023 and a further 8.6% in FY2024.
This volatility is also reflected in the bank's return on equity (ROE), a key measure of profitability, which fell from a peak of 11.25% in FY2022 to 8.85% in FY2024. This choppy performance suggests the bank's business model is sensitive to economic cycles and interest rate changes. For a company to earn a passing grade on its earnings track record, it needs to demonstrate a more stable and predictable path of growth.
The bank's credit history shows signs of stress, with a significant increase in the money set aside for potential bad loans in the most recent year, breaking a period of relative stability.
A review of First Merchants' credit metrics reveals a mixed and recently deteriorating picture. The provision for credit losses, which is the expense set aside for anticipated bad loans, was minimal in FY2023 at just $3.5 million. However, this figure jumped tenfold to $35.7 million in FY2024. This sharp increase suggests that management is seeing emerging risks in its loan portfolio and is proactively building reserves to cover potential future losses.
The allowance for loan losses as a percentage of gross loans has increased slightly from 1.41% in FY2020 to 1.50% in FY2024, showing that reserves are keeping pace with the growing loan book. However, the large, recent increase in provisioning expense is a red flag that interrupts an otherwise stable credit history. Compared to benchmark competitors like Commerce Bancshares, which is known for its exceptionally clean credit record, First Merchants' performance appears more volatile and concerning.
First Merchants has a strong record of consistently increasing its dividend, but this positive is undermined by a history of share dilution that reduces shareholder ownership.
The company has demonstrated a firm commitment to its dividend, increasing the annual payout per share every year for the past five years, from $1.04 in FY2020 to $1.39 in FY2024. This represents a compound annual growth rate of 7.5%. The dividend payout ratio has remained sustainable, typically between 35% and 40% of earnings, suggesting the dividend is well-covered and has room to grow.
However, the company's track record on share count is a significant weakness. Instead of buying back stock to increase shareholder value, the diluted share count has risen from 54 million in FY2020 to 59 million in FY2024. This ongoing dilution works against shareholders, as it spreads the company's profits across more shares. While the company repurchased $56.17 million in stock in FY2024, this single action does not reverse the multi-year trend of dilution. A truly shareholder-friendly capital return program should ideally involve both a growing dividend and a declining share count.
First Merchants Corporation's future growth appears modest and steady, driven by its strong Midwestern presence and disciplined operational focus. The primary tailwind is the potential for strategic, in-market acquisitions that leverage its strong capital position to expand its footprint and earnings power. However, significant headwinds include intense competition for loans and deposits, which is expected to pressure both growth volumes and profit margins. Compared to larger regional competitors who can invest more heavily in technology, First Merchants' growth will likely be more incremental. The investor takeaway is mixed; while the bank is a stable operator, its growth trajectory over the next 3-5 years is likely to be slow and steady rather than dynamic.
The outlook for loan growth is muted, reflecting a cautious approach to underwriting in an uncertain economic environment and intense competition, which will likely result in modest, low-single-digit growth.
First Merchants' loan growth prospects for the near future appear limited. In recent quarters, management has guided towards low-single-digit annualized loan growth, citing softer demand from commercial clients and a disciplined approach to credit risk. While this prudence protects the balance sheet, it signals a challenging growth environment. The bank's loan pipeline, while healthy, is not indicative of a major acceleration in lending activity. This conservative stance, combined with heightened competition from both larger and smaller banks fighting for a smaller pool of quality loans, means that loan growth is unlikely to be a significant driver of earnings expansion over the next 12-24 months. For a 'Future Growth' analysis, this subdued outlook is a clear weakness.
With a robust capital position, the bank is well-positioned to pursue its disciplined strategy of acquiring smaller, in-market banks and returning capital to shareholders through opportunistic buybacks.
First Merchants has a strong track record of prudent capital management, which provides significant flexibility for future growth. The bank's Common Equity Tier 1 (CET1) ratio consistently remains well above the regulatory minimum, providing a strong foundation for both organic growth and strategic acquisitions. Management has historically pursued a 'string-of-pearls' M&A strategy, acquiring smaller community banks within or adjacent to its existing footprint to gain market share and achieve cost synergies. While no deals have been announced recently amid market uncertainty, this remains a primary long-term growth lever. The company also maintains a share repurchase program, providing another avenue to enhance earnings per share. This disciplined and multi-faceted approach to capital deployment is a clear strength.
The bank maintains its branch network as a core part of its relationship-based model, focusing on optimizing existing locations rather than large-scale closures, while steadily investing in digital capabilities to meet evolving customer needs.
First Merchants' strategy for its physical footprint is one of stability and optimization, not aggressive consolidation. Unlike larger national banks that are rapidly shrinking their branch counts, First Merchants' 121 offices are central to its community-focused moat, serving as hubs for relationship building and deposit gathering. The focus is on improving efficiency, such as increasing deposits per branch, rather than outright closures. While the bank doesn't provide explicit targets, its digital user growth is a key priority to complement its physical presence. The risk is that this deliberate pace of digital investment may not be fast enough to satisfy the most tech-savvy customers or to achieve the cost savings seen at more digitally-focused peers. However, the strategy is logical and consistent with its business model, justifying a pass.
The bank faces significant headwinds from rising deposit costs, and while its loan portfolio will continue to reprice higher, the overall outlook is for a stable to slightly compressing net interest margin (NIM).
The net interest margin, the primary driver of the bank's profitability, is under pressure. Like the rest of the industry, First Merchants is experiencing a rapid increase in its cost of deposits as customers shift funds to higher-yielding accounts. Management's guidance suggests that NIM has likely peaked and is expected to stabilize or modestly decline in the coming year. While the bank has a decent portion of variable-rate loans that will benefit from higher rates, this is unlikely to fully offset the pressure on funding costs. A contracting or stagnant NIM acts as a direct drag on net interest income growth, making it difficult to expand earnings without substantial loan growth, which is also not anticipated. This lack of a clear catalyst for NIM expansion is a significant headwind to future profitability.
The bank's well-established wealth management division is a key driver of future growth, providing a source of high-quality, recurring fee income that diversifies revenue and reduces reliance on volatile net interest income.
A critical component of First Merchants' growth strategy is the expansion of its noninterest income, with a particular focus on its wealth management and trust services. This division already contributes over a third of the bank's total fee income, a segment that is generally higher-margin and less cyclical than lending. Management has indicated that growing assets under management (AUM) is a strategic priority. This focus is crucial for mitigating the impact of net interest margin compression. While the bank has not provided specific AUM growth targets, the emphasis on this stable and profitable business line is a significant positive for the future quality and diversification of its earnings stream.
As of October 27, 2025, with a closing price of $36.42, First Merchants Corporation (FRME) appears to be fairly valued with attractive income features. The stock's valuation is supported by a low trailing P/E ratio of 9.31 and a strong dividend yield of 3.86%, which are compelling in the regional banking sector. However, its price-to-tangible book value is not deeply discounted relative to its profitability. The stock is currently trading in the lower half of its 52-week range of $33.13 to $46.13, suggesting recent price weakness could present an opportunity. For investors focused on income and reasonable earnings multiples, the takeaway is positive.
The stock is trading at a premium to its tangible book value that is not fully supported by its current level of profitability, limiting the margin of safety.
Price to Tangible Book Value (P/TBV) is a key metric for banks, as it compares the stock price to the hard, tangible assets on the company's books. First Merchants' tangible book value per share is $29.02. At a price of $36.42, the P/TBV is 1.25x. A bank's P/TBV multiple is often considered fair when it aligns with its Return on Tangible Common Equity (ROTCE). With a current ROE of 9.54% (a proxy for ROTCE), a 1.25x multiple appears slightly rich. A P/TBV closer to 1.0x would be more attractive for this level of return. While not excessively overvalued, the stock does not offer a discount to its net asset value, failing the conservative test for a clear "Pass".
The company's Price to Book (P/B) ratio is below `1.0x` while it generates a solid Return on Equity (ROE), suggesting the market is undervaluing its profitability.
A bank's ability to generate profit from its equity (ROE) should be reflected in its Price to Book (P/B) multiple. First Merchants currently has an ROE of 9.54% and a P/B ratio of 0.87x (based on book value per share of $41.74). An ROE near 10% would typically justify a P/B ratio around 1.0x. Since FRME's P/B ratio is below this level, it indicates a misalignment in the investor's favor. The market is pricing the company's book value at a discount, despite its capacity to generate solid returns, which signals potential undervaluation.
The stock's low P/E ratio combined with recent strong quarterly earnings growth suggests it may be undervalued relative to its near-term profit potential.
First Merchants trades at a trailing P/E ratio of 9.31, which is low on an absolute basis and attractive compared to the broader market. This metric, the price-to-earnings ratio, helps investors gauge if a stock is cheap by showing how many dollars they are paying for each dollar of the company's profit. While the prior full year's EPS growth was negative, the most recent quarter saw a significant rebound with 16.82% year-over-year EPS growth. This suggests that operational performance is improving. The resulting PEG ratio (P/E divided by growth rate) is well below 1.0, a common indicator of a potentially undervalued growth opportunity.
The stock offers a strong total return to shareholders through a combination of a healthy dividend yield and share repurchases.
First Merchants presents a compelling case for income-focused investors. The dividend yield is a robust 3.86%, with an annual payout of $1.44 per share. This is supported by a conservative payout ratio of 35.48% of TTM earnings, which indicates the dividend is well-covered by profits and has room to grow. Furthermore, the company has been actively returning capital to shareholders via buybacks, evidenced by a 1.44% reduction in shares outstanding in the most recent quarter. This combination of dividends and buybacks results in a total shareholder yield that is attractive within the banking sector.
Compared to typical regional bank valuations, First Merchants' combination of a low P/E ratio and a high dividend yield appears favorable.
On a relative basis, FRME shows attractive characteristics. Its trailing P/E of 9.31 is below the average for the regional banking industry, which often trades in the 11x to 13x earnings range. Additionally, its dividend yield of 3.86% is a significant premium over what many peers offer. While its price-to-tangible book of ~1.25x may be in line with or slightly above some peers with similar profitability, the strength of its earnings and income profile makes it stand out. The stock's beta of 1.06 indicates it moves largely in line with the broader market.
The primary risk for First Merchants is its sensitivity to macroeconomic conditions, particularly within its operating footprint of Indiana, Ohio, Michigan, and Illinois. A prolonged period of high interest rates could continue to squeeze its net interest margin (NIM)—the key measure of bank profitability—as the cost to attract and retain customer deposits may rise faster than the income earned on loans. Conversely, a sharp economic downturn or recession in the Midwest would directly impact its customers, leading to an increase in loan defaults, higher credit losses, and reduced demand for new loans, all of which would negatively affect earnings.
The banking industry is undergoing significant competitive and regulatory shifts. First Merchants competes directly with money-center banks like JPMorgan Chase and Bank of America, which have far greater resources for technology and marketing, as well as smaller community banks and credit unions fighting for local market share. Furthermore, the rise of financial technology (fintech) companies continues to disrupt traditional banking services, pressuring fees and customer relationships. On the regulatory front, banks of FRME's size may face increased scrutiny and potentially higher capital requirements following the regional banking turmoil in 2023, which could increase compliance costs and constrain its ability to grow and return capital to shareholders.
From a company-specific standpoint, a key vulnerability lies within its loan portfolio, which has a notable concentration in commercial real estate (CRE). While the portfolio appears well-managed, the CRE sector, particularly office and certain retail properties, faces long-term headwinds from remote work and the growth of e-commerce. A significant downturn in commercial property values could lead to material credit losses. The bank has also historically relied on acquisitions to fuel growth. While this strategy can be effective, future deals come with inherent integration risks, such as merging different corporate cultures and IT systems, and the risk of overpaying for a target, which could fail to create the expected value for shareholders.
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