FIRST MERCHANTS CORP (FRME): what the price requires
At today's price, FIRST MERCHANTS CORP (FRME) is priced for 9.8% return on equity. boothcheck doesn't publish a fair value or a price target; it shows what the price assumes, so you can judge whether that bar is too high.
Generated: 2026-07-14 · Exported: 2026-07-16 · Source: https://boothcheck.com/report/FRME
Headline
| Field | Value |
|---|---|
| Ticker | FRME |
| Company | FIRST MERCHANTS CORP |
| Current price | $43.48/sh |
What The Price Requires (Inversion)
The assumption today's price embeds, recovered by inverting the valuation.
| Field | Value |
|---|---|
| Inversion basis | financials |
| Return on equity needed | 9.8% |
| Return on equity now | 9.1% |
| ROE gap | +0.7pp |
| Price-to-book | 1.03x |
Solve inputs: computed at a 9.6% cost of equity with 4% terminal growth over a 5-year stage, on common book equity (FY2026); each 1pp of cost of equity moves the implied ROE ~1pp.
How unusual the bet is: within-range
| Reference | Value |
|---|---|
| vs own history | +0.78σ |
| cohort percentile (of 119 peers) | 8 |
| sustained it ~10 years at this level | 77% |
| implied end-window share | 0% |
Valuation X-Ray
The price is supported by asset-based value, while earnings-power/growth-DCF land below the price. A value/asset-supported name, not a pure growth bet.
How the valuation models price the stock relative to the market price. Price/FV above 1.0 means the market pays more than that lens defends (expensive); at or below 1.0 the lens can defend the price.
| Family | Median price/FV | Models | Reads |
|---|---|---|---|
| Asset | 1.23x | 3 | expensive |
| Earnings | 1.58x | 2 | expensive |
| Relative | 1.26x | 1 | expensive |
| Growth | 1.65x | 3 | expensive |
Families that justify the price: Asset Families that call it expensive: Earnings, Growth
The models below discount at their own flat-beta convention rates (cost of equity 9.3%, WACC 5.0%); the inversion above states its own rate.
Per-Model Detail (n=9)
| Model | Family | FV | Price/FV | Applicable | Methodology |
|---|---|---|---|---|---|
| DCF Perpetual Growth | Growth | — | — | no | — |
| Bank Fair Value (P/TBV) | — | $16.96 | 2.56x | yes | TBVPS $30.29 × 0.56x (ROE (TTM) 7.4% / CoE 9.3%, g=4.8% (sustainable: 65% retention × ROE, 5% cap; not the terminal-growth assumption), credit 1.41% allowance/loans → ×0.95, NPL 0.60% → ×1.00) |
| Relative Valuation | Relative | $34.60 | 1.26x | yes | P/E 10x (static sector reference · 2026-04), scenarios: 8.3x / 10.0x / 11.7x (bear / base = reference held flat / bull), EV/EBITDA N/Ax |
| Simple DDM | Growth | $88.77 | 0.49x | yes | DPS $1.50, g=7.4% (sustainable: ROE (TTM) × retention; not the terminal-growth assumption), ke=9.3% |
| Two-Stage DDM | Growth | $22.72 | 1.91x | yes | Stage 1: -0% for 5yr, Stage 2: 3.5% perpetual |
| Simple Excess Return | Asset | $35.23 | 1.23x | yes | BV/sh $43.81, ROE (TTM) 7.4%, ke 9.3% |
| Two-Stage Excess Return | Asset | $31.46 | 1.38x | yes | 5yr excess ROE then converge to ke=9.3% |
| Discounted Future Market Cap | Growth | $26.33 | 1.65x | yes | Rev $0.6B, growth 6% (input: historical growth; tapered), Terminal P/S: 4.0x / 4.8x / 5.5x (bear / base = today's held flat / bull, cap 8x) |
| Growth-Adjusted P/E | Relative | — | — | no | — |
| Margin Trajectory | Growth | — | — | no | — |
| Earnings Power Value | Earnings | — | — | no | — |
| Residual Income | Asset | — | — | no | — |
| Graham Number | Asset | $57.80 | 0.75x | yes | √(22.5 × EPS $3.39 × BVPS $43.81) — Graham's conservative floor |
| EV/EBITDA Relative | Relative | — | — | no | — |
| FCF Yield | Earnings | — | — | no | — |
| SBC-Adj FCF Yield | Earnings | — | — | no | — |
| Ben Graham Formula | Earnings | $22.11 | 1.97x | yes | EPS $3.39 × (8.5 + 2×-0.4%) × (4.4 / 5.3%) |
| ROIC-Justified P/B | Asset | — | — | no | — |
| P/Sales Sector | Relative | — | — | no | — |
| PEG Fair Value | Relative | — | — | no | — |
| Earnings Yield | Earnings | $36.65 | 1.19x | yes | EPS $3.39 / required return 9.3% (Rf 4.3% + ERP 5.0%) |
| Funds From Operations Multiple | Relative | — | — | no | — |
| Clinical Phase NPV | Growth | — | — | no | — |
| Merton | Asset | — | — | no | — |
| V5 Mechanical | — | — | — | no | — |
Solvency
| Field | Value |
|---|---|
| Share count CAGR (dilution) | 3.3% |
Deposit/float-funded balance sheet: debt is funding, not corporate leverage, and GAAP operating cash flow follows loan flows. Net-debt, interest-coverage, and cash-burn lenses do not apply. The solvency frame for a financial is regulatory capital and payout capacity (CET1, stress buffer, dividends plus buybacks against earnings).
Bullet Takeaways
- First Merchants is a Midwest commercial bank that just crossed $21.1 billion in total assets after folding in the $2.4 billion First Savings acquisition, with a net interest margin of 3.35% and net interest income up 16.1% year over year.
- The biggest risk is the loan book's tilt toward commercial real estate, the company's stated lending focus per its 10-K, which is the segment most exposed if the regional property cycle turns.
- Watch the gap between reported and adjusted earnings: first-quarter reported EPS of $0.45 was held down by acquisition charges, while adjusted EPS was $1.03, and the next clean quarter will show which figure reflects the run-rate.
Bull Case
The most counterintuitive number in the data is the return on equity. On a trailing basis it reads about 7.4%, below the bank's roughly 9.3% cost of equity, which on its face says the company is destroying value. But that figure carries the cost of integrating a recent acquisition, and it conflicts with what the franchise actually earns when running clean. First-quarter reported earnings of $0.45 per share included one-time charges tied to the First Savings deal; adjusted earnings were $1.03 per share. A bank earning over a dollar a share quarterly on roughly $44 of book value is generating a far healthier return than the trailing number suggests. The bull case starts with recognizing that the depressed return is a snapshot distorted by a deliberate investment, not the steady state.
The core engine is widening. Net interest margin reached 3.35%, up 6 basis points from the prior quarter, and net interest income of $151.3 million rose 8.8% sequentially and 16.1% against the year-earlier quarter. Margin is the heart of bank profitability, the spread between what the bank earns on loans and securities and what it pays for deposits, and the 10-K defines it precisely as "interest expense expressed as a percentage of average earning assets. A rising margin alongside double-digit net interest income growth means the bank is growing earning assets and pricing them well at the same time.
The growth model is acquisition plus organic share-take in a defensible footprint. The First Savings deal added $2.4 billion in assets and pushed total assets to $21.1 billion. The 10-K describes the lending franchise as focused on "small business and middle market commercial, commercial real estate, public lending, the relationship-driven niches where regional banks hold pricing power against both megabanks and fintechs. Acquisitions in this business compound tangible book value when the acquirer integrates cost and funding efficiently, and the rising margin suggests the funding side is being managed well. For a value-and-asset-supported name, the bet is straightforward: pay near tangible book for a bank whose underlying return, once the deal charges wash out, comfortably exceeds its cost of capital.
Bear Case
The cycle is the right lens for the bear, and the cycle question lands squarely on commercial real estate. First Merchants describes its lending franchise as centered on "small business and middle market commercial, commercial real estate, public borrowers, and commercial real estate is the loan category most sensitive to the part of the cycle the regional banking sector is now navigating. When property values soften and refinancing rates stay elevated, owners of office, retail, and other commercial buildings struggle to service or roll their loans, and the losses land on the banks that financed them. A bank's earnings look fine right up until a credit cycle turns, at which point provisions for loan losses surge and the prior years of net interest income are partly clawed back. The current price, supported by asset-based and relative-multiple methods, prices the loan book at close to its stated value, which assumes the credit cycle stays benign.
The acquisition strategy adds its own risk. Buying another bank means paying up. The 10-K is explicit that "acquisitions typically involve the payment of a premium over book and market values, and that acquired loans are recorded at fair value based on discounted expected cash flows. Pay too much, or misjudge the credit quality of the loans you absorb, and the deal dilutes tangible book and depresses returns for years. The reported first-quarter return on equity of 7.4%, sitting below the cost of equity, is exactly the kind of number that integration produces, and the bull case requires faith that it reverses cleanly. If the First Savings loans season worse than modeled, the adjusted earnings that look so much healthier today narrow toward the disappointing reported figure.
The forward-growth methods already say the price is full. They reach above today's quote only on aggressive assumptions, while the more conservative asset and earnings lenses cluster near or modestly below the price. For a bank earning a trailing return below its cost of capital, that is the honest read: the value is in the book, not in a growth story, and the book is only worth its stated value if credit holds. A regional bank concentrated in commercial real estate, mid-acquisition, with a return that has not yet cleared its hurdle rate, is a value name whose value rests entirely on the cycle behaving.
Valuation
For a bank, value is read off the price relative to tangible book and the return earned on that book, and First Merchants is priced as a value name rather than a growth one. The price is supported by the asset-based and relative-multiple methods, while the forward-growth methods say it is expensive. That pattern is the signal: the market is paying for the equity the bank holds, not for an acceleration in earnings.
The specifics frame the bet. Book value is about $43.81 per share and tangible book about $30.29, and the bank's trailing return on equity is roughly 7.4% against a cost of equity near 9.3%. A bank that earns less than its cost of capital warrants a price below book, and the tangible-book lens reflects exactly that, applying a multiple well under one times to capitalize the sub-hurdle return. The relative-multiple lens, using a sector price-to-earnings near 10 times, lands modestly below the current price. The excess-return methods, which build value from book plus the spread between return and cost of equity, cluster around the price. The whole set says the same thing in different ways: at $40.77 (June 27, 2026) the stock is priced close to what its current returns justify, with little credited for growth. The reconciliation that matters is the one between the depressed trailing return and the cleaner adjusted earnings the company reports; if the adjusted run-rate holds once acquisition charges fade, the return rises toward and past the cost of equity, and the value methods would support more.
Solvency for a bank is read through regulatory capital and deposit funding, not net debt, because deposits are funding rather than corporate leverage. On that frame First Merchants is a conventional, well-capitalized regional bank whose balance sheet just expanded through acquisition, with share count growing modestly to fund the deals. The decisive variable is not leverage but credit: whether the commercial real estate concentration the bank centers its lending on holds up through the cycle. The price assumes it does.
Catalysts
First Merchants reported first-quarter 2026 results in April, with net income available to common stockholders of $27.7 million, or $0.45 per diluted share on a reported basis, and $63.1 million, or $1.03 per diluted share, on an adjusted basis. The gap between the two reflects one-time charges from the First Savings acquisition, which closed in the period and added $2.4 billion in assets, lifting total assets to $21.1 billion. The next earnings report, free of deal charges, is the cleaner read on the underlying run-rate.
The operating trends were the strength. Net interest margin rose to 3.35%, up 6 basis points sequentially, and net interest income reached $151.3 million, up 8.8% from the prior quarter and 16.1% from the year-earlier quarter. Management framed the quarter as adjusted EPS growth on an expanding margin and healthy fee income, the combination that drives bank profitability.
The items to watch from here are the seasoning of the acquired loan book, the trajectory of the net interest margin as deposit costs and asset yields reprice, and any movement in credit provisions tied to the bank's commercial real estate exposure. The integration of First Savings is the near-term swing factor between the reported and adjusted earnings figures.
Peer Cohorts (Per Segment, With Filing Citations)
Community Banking (single reportable segment) (reported)
- FULT (FULTON FINANCIAL CORP)
- (no filing in the citation store)
- BANR (Banner Corporation)
- (no filing in the citation store)
- TCBK (TriCo Bancshares)
- (no filing in the citation store)
- CVBF (CVB FINANCIAL CORP.)
- (no filing in the citation store)
- CATY (Cathay General Bancorp)
- (no filing in the citation store)
- WSFS (WSFS FINANCIAL CORPORATION)
- (no filing in the citation store)
- VLY (VALLEY NATIONAL BANCORP)
- (no filing in the citation store)
- WBS (WEBSTER FINANCIAL CORPORATION)
- (no filing in the citation store)
Methodology Note
- Priced-in inversion: the valuation is inverted on the current price to recover the operating-income growth, duration, and steady-state margin the price embeds (ROE for financials, FFO growth for REITs).
- Valuation x-ray: the valuation models, grouped into four families (asset, earnings, relative, growth). Each model is expressed as a price/FV ratio (distance from price), not a point fair-value estimate. The spread across families is the disagreement.
- Solvency: net cash/debt, net-debt-to-NOPAT, interest coverage, and share-count CAGR from EDGAR financials (net debt / FFO and fixed-charge coverage for REITs; regulatory-capital framing for financials).
- Peer cohorts: per-segment comparables with deep-linkable SEC filing citations.
Fundamentals sourced from SEC EDGAR filings. Current price from Databento. The priced-in inversion and valuation x-ray are computed by the boothcheck engine; narrative composed by AI from the structured data.
Sources
Q1 2026 results, April 2026 · Q1 2026 results release, April 2026